Microfinance Institutions In Poverty Reduction
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Microfinance can be a critical element of an effective poverty reduction strategy especially for developing countries. The services provided by microfinance institutions can enable the poor to smoothen their consumption, manage their risks better, build their assets gradually, develop their micro enterprises, enhance their income earning capacity, and enjoy an improved quality of life. This paper examined the extent to which Microfinance Institutions (MFIs) contribute to poverty reduction in Haryana. Following the information collected from both microfinance institutions and their clients, it was revealed that MFIs have changed the life of poor people in a positive way. MFIs' clients have increased their incomes, capital invested and therefore expansion of their businesses. Despite these achievements it was further observed that some conditions like grace period for loan repayment, collateral and MFIs coverage have been limiting factors for poor people to access the MFI services.
Key words: Microfinance Institutions, Micro and Small Enterprises, Poverty Reduction
Microfinance can be a critical element of an effective poverty reduction strategy. Improved access and efficient provision of savings, credit, and insurance facilities in particular can enable the poor to smooth their consumption, manage their risks better, gradually build their asset base, develop their micro enterprises, enhance their income earning capacity, and enjoy an improved quality of life. Researchers argue that the Microfinance Institutions (MFIs) are useful as they
i) reduce poverty through increased income and standards of living;
ii) empower women;
iii) develop the business sector through growth potentials, and
iv) develop a parallel financial sector.
It is generally accepted that without permanent access to institutional microfinance, most poor households would continue to rely on meagre self-finance or informal sources of microfinance, which limits their ability to actively participate and benefit from development opportunities.
The proponents of credit approach argue that people who live in developing countries might improve their living standards by becoming micro entrepreneurs and that financial institutions should support their initiatives with small loans. This is true because well established and sustainable micro and small enterprises in many societies contribute to the growth of national income, more employment opportunities, better standard of living and hence to the reduction of poverty. However, according to the International Finance Corporation, 60% to 69% of the population in many countries have no access to conventional financial institutions.
Due to the decline of the public sector, the role of Micro and Small Enterprise (MSEs) in promoting economic growth and development, offering increased employment and reducing income disparities has been widely recognised. In Haryana, Micro and Small Enterprises contribute 12% and 34% of rural and urban employment respectively as well as up to 32% of the GDP.
The increased participation and contribution of MSEs has led to an increased need for financial services. Credit has been recognised as one of the tools for promoting the development of MSEs. Loans enable the individual member or enterprise to enjoy both benefits of economies of scale and those of new high-value technology.
Recognising the importance of financial services to MSEs, during 2000 the government of Haryana developed the National Microfinance Policy in line with the overall financial reforms initiated in 1999. The policy aims at enabling low-income earners to access financial services. Microfinance Institutions (MFIs) have became alternative sources for financing MSEs in place of Formal Financial Institutions (FFIs), which regarded MSEs as too poor to save, having low borrowings and carrying a default risk. The policy further aims at raising the income of both households and enterprises, by facilitating savings, payments, and insurance and credit services.
Despite the recognition of the dynamic role of credit to small enterprises, few business owners and the poor in rural Haryana have access to, and benefit from, the available financial services. MFIs activities remain centred around urban areas. Operational performance demonstrates low loan payment rates and the capital structure reveals a high dependence on donor or government funding.
REVIEW OF LITERATURE ONTHEIMPACTOF MICROFINANCE
Microfinance Institutions (MFIs)
Microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfer, and insurance to poor and low-income households and their micro enterprises. Microfinance does not only cover financial services but also non-financial assistance such as training and business advice. The principal providers of financial services to the poor and low income households in the rural and urban areas of Haryana consist of licensed commercial banks, regional and rural unit banks; savings and credit cooperative societies; and several NGOs whose micro-credit delivery operations are funded and supported with technical assistance by international donors.
Micro and Small Enterprises (MSEs)
There is a wide range of definitions for MSEs, but for the purpose of this study, a MSE is defined as a productive activity either to produce or distribute goods and or services, mostly undertaken in the informal sector. A typical micro enterprise employs fewer than five workers, usually family members and has very limited fixed assets. A small enterprise on the other hand, employs more than five workers and most of them are in a formal sector with much higher fixed assets compared to micro enterprise. According to the Small and Medium Enterprises Development Policy, small enterprises are formal undertakings engaging between 5 and 49 employees, or with capital investment ranging from 5 million to 20 million.
DEFINITION OF POVERTY
Poverty at its broadest level can be conceived as a state of deprivation prohibitive of decent human life. This is caused by lack of resources and capabilities to acquire basic human needs as seen in many, but often mutually reinforcing parameters which include malnutrition, ignorance, prevalence of diseases, squalid surroundings, high infant, child and maternal mortality, low life expectancy, low per capita income, poor quality housing, inadequate clothing, low technological utilization, environmental degradation, unemployment, rural-urban migration and poor communication. Poverty is caused by both internal and external factors. Whereas the internal causes can be clustered into economic, environmental and social factors, the external causes relate to international trade, the debt burden and the refugee problem.
Microfinance in Haryana is one of the approaches that the government has focused its attention in recent years in pursuit of its long term vision of providing sustainable financial services to majority of Haryana population. In Haryana, before the current financial and banking restructuring took place, most of financial services for rural, micro and small enterprises were offered by the National Bank of Commerce (NBC) and the Co-operative and Rural Development Bank (CRDB).
Since 1991, the government has been implementing financial sector reforms aimed at putting in place a competitive, efficient and effective financial system. Although the reforms have had reasonable success in bringing about the growth of competitive and efficient mainstream banking sector, it has not brought about increased access to basic financial services by the majority of the Haryana, particularly those in rural areas. The realization of the above shortcoming led to the Government's decision to initiate deliberate action to facilitate alternative approaches in the creation of a broad based financial system comprising of a variety of sustainable institutions with wide outreach and offering diverse financial products (ibid). The government's choice of microfinance was influenced by the conviction that, given adequate attention, microfinance has the potential to contribute considerably to the economic development of the country because it is more adapted to the needs of the low-income population which makes up the majority of Haryana.
REVIEW OF STUDIES DONE OUTSIDE OF HARYANA
Studies on MFIs have been conducted in various countries all over the world. The findings from these studies are useful to new researches on microfinance. Some of the studies, which had a significant contribution, include the study by Mosley (2001). In his study on Microfinance and Poverty in Bolivia, Mosley assessed the impact of microfinance on poverty. The study was conducted through small sample surveys of four microfinance institutions, two urban and two rural, using a range of poverty concepts such as income, asset holdings and diversity, and various measures of vulnerability.
All the institutions studied had on balance, positive impacts on income and asset levels, with income impacts correlating negatively with income on account of poor households choosing to invest in low-risk and low-return assets. This study revealed also that in comparison with other anti-poverty measures, microfinance appears to be successful and relatively cheap at reducing the poverty of those close to the poverty line. However this was also revealed to be ineffective, by comparison with labor-market and infrastructural measures, in reducing extreme poverty. The study further proposed actions that appear to be promising for the further reduction of poverty in Bolivia which can also be useful for other developing countries. These actions include stronger efforts to mobilize rural savings, removal of lower limits on loan size, and the introduction of appropriate insurance mechanisms.
Despite this contribution, the study by Mosley has some weaknesses. The first problem is on the sample size which was only four microfinance institutions, this sample size might not be adequate for the generalizations made above. Also the poverty concepts considered excluded the number of employees, this is very important to measure, as it indicates whether the microfinance institution has created capacity to employ more people or not.
Hassan and Renteria-Guerrero made another empirical contribution in this area. In their work "The experience of the Grameen Bank (GB) of Bangladesh in community development", they examined the GB experience with a purpose of understanding the essential elements of its operations and the factors that enabled GB to reach the poor. This study revealed that the GB has established its credentials as an institution that aims at providing credit to the landless and asset less poor in rural areas. GB credit gives the recipients the power of entitlement to society's productive goods and services with immediate effect, unlike most of the other programmes for the poor that tend to create the unintended negative effect of dependency on the service providers. However, it was observed the credit by itself is an insufficient factor to improve poverty conditions, and thus the GB devotes a substantial amount of resources to the improvement of the social wellbeing of its members.
The GB uses an unambiguous eligibility criterion which ensures that only the poor or very poor can participate. It motivates their clients to organize themselves into groups of five like-minded members. Each group elects one group leader among themselves. Every six groups form a "centre" which serves as the basic operating unit of the GB. It is at the centre that weekly meetings are conducted to openly discuss loan applications proposals and to accept weekly repayments and compulsory savings deposits. While the loans are made to individual members, the group as a whole is expected to be responsible for the regular repayments of the loans of all their members. This form of grassroots organization not only promotes solidarity and participation among the members, at the group and centre levels, but also promotes mutual support and peer pressure to ensure that the loans are properly utilized and repayments made promptly. In concluding their work, Hassan and Renteria-Guerrero assert that the GB's approach seems to be an effective tool for rural poverty reduction despite minor criticism that has never given alternative solution for poverty alleviation. The programme supplies credit to improve the physical productive capacities of the poor and in addition, it provides the disadvantaged with human development inputs to improve their overall productive and living standards. The success of the GB is not free from the influence of external factors. To be effective and sustainable, a credit delivery system also needs a supportive national policy framework for it to remain autonomous and free from political influence. Despite the fact that this work was just an experience and not a research work, we acclaim its contribution in the area of microfinance practices.
RESEARCHMETHODOLOGY AND DESIGN
The design of the methodology for this study was greatly influenced by the works by Mosley, Hassan and Renteria-Guerrer, Kuzilwaand Rweyemamu et al. Our research was executed in three stages. In the first stage, a pilot study was undertaken to pre-test the questionnaires. This was followed by a survey, and in the third stage a case study was undertaken. The study used both quantitative and qualitative data. Primary and secondary sources of data were also used in this study. For primary data generation, respondents were drawn from both MFIs and MFIs' customers. The respondents comprised MFIs' officers, owners/managers of enterprises financed by these MFIs and other stakeholders who in one form or another are involved with microfinance and poverty reduction. The information gathered from MFIs, included the distribution of their clients (major cities, towns and rural areas), lending mechanisms, types of clients and financial products offered. Further inquiries were made on other services given to supplement loans, rate of client turnover etc. From the side of the clients (MSEs), the questions were based on ease of accessing loans and technical support from the MFIs, and changes to their welfare as a result of the MFI loan.
The introduction of MFIs is seen as the best alternative source of financial services for low income earners in rural areas as a means to raise their income, hence reducing their poverty level. However evidence has shown that these MFIs have limited coverage, poor organizational structures and some are donor driven. These findings stimulated research to investigate if the coverage of MFIs is as stipulated in the National Micro Finance Policy (NMFP) that is, covering small business owners and the poor rural population.
This study aims at finding out the extent to which Microfinance Institutions (MFIs) contribute to poverty reduction in Haryana, and whether they meet the objectives of the policies that led to their establishment.
The study centred on the following specific aspects:
To assess whether MFIs direct their services to the poor population and micro and small businesses (particularly in rural areas) and whether conditions and procedures for credit favour these target groups.
To assess whether the customers reached by these schemes improved their general performance in terms of growth, creation of employment and generation of income.
Do the conditions and procedures set by MFIs favour the poor and low-income earner clients?
Do the target groups receive adequate MFIs services?
To what extent do MFIs services contribute to poverty reduction? (This means an increase in MFIs' customers' wealth, i.e. generation of more income, increase in investments, creation of more employment opportunities, etc.)
Significance of the Study
This study will be of benefit to MFIs, policy makers, MSEs and the community at large. The study explores and recommends potential areas that MFIs need to put more efforts when delivering their services. On the other hand, policy makers will also benefit in the sense that, the findings provide informed suggestions on how policy can be improved. With improved and easy to implement policies, more MSEs and the community at large will be able to access and benefit from the services of MFIs.
Sampling Procedures and Sample Size
The study covered four regions of Haryana that have a high concentration of MFIs.
In these four regions the study covered a total number of 352 MSEs supported by the selected MFIs. The MSEs were selected by random sampling (using the appropriate table).
Data Collection and Instruments
The study employed different methods of data collection, whereby both primary and secondary data were collected. Questionnaires were administered to both MFIs and MSEs to collect the primary data. In addition to this method, interviews were conducted in order to gather relevant additional information.
The study also used secondary data, and the main sources were various official documents and reports relevant to the research problem. Questionnaires were first administered to few respondents from both MFIs and MSEs as pre-test and appropriate adjustments were made.
The descriptive and statistical analysis was conducted basing on data and information collected from primary and secondary sources on both MFIs and MSEs. The information analysed on MFIs included general profile, clients' outreach and the market, product and services provided, impact assessment, and future plan and constraints. On the side of MSEs, the issues analysed included general profile, types of services received from MFIs, conditions for service accessibility, and future plan and constraints for growth.
Quantitative data were analysed using the Statistical Package for Social Science (SPSS) software to compute percentages, tabulation and cross-tabulation of responses. SPSS was chosen because it can take data from almost any type of file and use them to generate tabulated reports, charts, perform descriptive statistics and conduct complex statistical analyses.
General Profile of MFIs and MSEs
Types of MFIs Surveyed and Lending Methodologies Used
The study covered various types of MFIs, which range from merger, self finance/informal sources of finance to formal sources like credit/savings institutions, microfinance bank, and private commercial banks. Among the surveyed institutions the majority (43.2%) were credit and savings institutions, 18.9% credit only (not-for-profit organisations), 8.7% microfinance banks and 5.4% private banks. The survey also included some other institutions such as faith-based organizations, the Presidential fund, parastatal organizations and government institutions supporting MSEs (23.8%).
The findings revealed that, MFIs used various lending mechanisms. Some of these observed included "solidarity group" (individual lending with cross guarantorship), individual lending, and village bank lending. During the survey it was observed that the most used method was solidarity group, with individual lending and village bank lending supplementing the solidarity group method.
Profile of the MSEs
Both urban and rural MSEs were covered. The majority (98%) were located in cities and towns compared to 2% located in rural areas. MSEs covered were those established between 1980 and 2003. Most of them (64.7%) were established by capital obtained from other sources and later received a loan from a MFI. Few of them, 35.3%, were established through capital from a MFI. Among the surveyed MSEs, 59.8% were formal registered enterprises and 40.2% unregistered ones. It was further observed that most of the surveyed MFIs (73.5%) started microfinance operations between 1990 and 2001.
Types of Clients and Market Outreach
The findings show that most of clients served by MFIs were in the informal sector as shown in Table 4.1. Among the surveyed MFIs, 89.7% dealt with informal/unregistered businesses with less than 5 employees, while 34.8% of MFIs dealt with registered business and only 17.4% of MFIs dealt with registered businesses with more than 5 employees.
Status of MFIs' Clients
Types of Clients
Informal Sector/Unregistered businesses
Registered Businesses with less than 5 employees
Registered Businesses with more than 5 employees
Source: Field data
Most of the MFIs concentrated their activities in either town centres or major cities. On average it was observed that 37.6% of MFIs operations are based in major cities, 48.0% in town centres and only 14.4% of MFIs are based in rural areas. The poor state of the physical infrastructure was an obstacle in reaching remote areas.
Types of Services Provided by MFIs
Few clients accessed the technical support offered by MFIs. Out of the 352 surveyed MSEs only 38.7% received technical support (Table 4.2). The results further revealed that the majority (43.4%) of clients who received technical support had attained an ordinary level of secondary education.
Of those clients who had received technical support, 21.5% were clients of PRIDE Haryana. Another institution which offered technical support was SIDO, with 11.5% respondents receiving technical support. Beneficiaries of other institutions had received technical support but at a very minimal percentage. The pre-loan training offered by most of MFIs was not considered as technical support training by most MSE owners.
Micro and Small Enterprises Achievements
To a large extent MFIs operating in Haryana have brought about positive changes in the standards of life of the clients who received MFI services. 81.3% of the surveyed MSEs revealed that their profit had increased after receiving the loan. Most of the clients (54.6%) who experienced an increase in profit after receiving the loan were in the age group of 25 to 39 years. With regard to the level of education, the majority, 37.6% of respondents who had achieved a positive change in their profit after the loan had attained an ordinary level of secondary education.
Constraints and Future Prospects of MSEs
With regard to the constraints in running a business, 92.5% of respondents cumulatively pointed out lack of continued business support and training as the major constraint. Even with the training provided by MFIs in some cases, it did not meet expectations of recipients. As the case of one MFI, PRIDE Tz:
"The pre-loan training normally aims at familiarizing the clients with the PRIDE's loan terms and conditions".
The PRIDE Tz loan sizes ranges from 50,000 (about US$50) to 5,000,000 (about US$5,000) as shown. The current loan sizes were reviewed in 1996. Previously, the minimum and maximum loan sizes were 50,000 and 600,000 respectively. The higher loan sizes have been reviewed upwards overtime while the minimum loan size has not been reviewed since inception of the programme.
Further discussions were conducted with 18 PRIDE Tz clients to get more information on how PRIDE Tz assisted their MSEs. The respondents had MSEs which operated in different types of businesses. Of these interviewed respondents 44.4% were male and 55.6% were female. In addition to the individual interview, a focus group discussion was conducted to obtain views of clients as a group. This subsection presents the findings of the interview and focus group discussion of MSEs supported by PRIDE Tz.
RESEARCH FINDINGSAND OBSERVATIONS
This section covers the general profile of MFIs and MSEs, types of clients, market outreach and types of services provided by MFIs. It also presents the findings of MFIs impact assessment, conditions for service accessibility and the contribution of MFIs to poverty reduction. Furthermore, the findings of the case study of Promotion of Rural Initiative and Development Enterprise PRIDE Haryana Limited (PRIDE Tz) which was conducted to get more insights of microfinance contribution to poverty reduction are presented. The chapter concludes by giving the summary and implication of the results
To a large extent MFIs operation in Haryana has brought about positive changes in the standard of living of people who access their services. Although some of the clients have not benefited, most MFIs clients have benefited positively. Despite the achievements of MFIs clients, most of them complained that, the interest rates charged by MFIs were very high.
The findings reveal that the process of application for loans starts with small amount and after repayment the client can apply for next higher amount. This process was observed to be a limiting factor for those customers who needed a large amount right from the beginning. This is true because it takes an unnecessarily long time for those seeking a large loan to obtain enough funds to meet their needs. In addition to the time taken to receive large loans, the clients also raised concerns about the time frame from the receipt of the loan to the time of starting repayment, which is just one week after the disbursement of funds in most cases. The surveyed MFIs conducted a pre-lending training programme, but it was further observed that, the training was provided by loan officers who were not experts or practitioners in the area of small business. The training concentrated more on familiarising the clients with loan terms and conditions rather than providing small business skills. This practice may build up the spirit of loan repayment but does not influence business growth. Clients also mentioned that, the required weekly reporting to the MFIs office was very high (i.e. one day in every week where they spend almost the whole day). This consumed a lot of productive time and hence reduced the time they could concentrate on other productive activities.
The following recommendations are put forward in order to improve operations of MFIs.
1. The interest rate should be lowered to a level that would cover MFIs' operating expenses and at the same time facilitate the growth of their clients' business.
2. MFIs should consider the possibility of increasing the grace period and reducing the frequency of repayment so as to provide for clients with long term loans turn to businesses such as farming.
3. The poor state of the infrastructure, especially rural roads, was pointed out as the main reason why MFIs fail to operate in rural areas. In addition to improvement of infrastructure the Government of Haryana, in collaboration with MFIs, should introduce trade exhibitions to their micro and small businesses in order to expand the MSEs' market coverage.
4. MFIs should restructure their training contents to include improving their clients' business skills. They should organise regular business training for their clients and qualified training institutions should conduct this.
5. Regarding the issue of small base loans, the MFIs should be flexible by raising the minimum base to reflect changes in the value of money over time.
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