Micro-Finance: A Tool to Empowerment & Development

Dr. Amit K. DwivediEntrepreneurship Development Institute of

IndiaGandhinagar, Gujarat

Number of Savings Accounts(Million)

Total Accounts per 100 persons still too less.

Source: Report on Currency and Finance 2006-08

Institution / End-March 1993 2002 2007

Scheduled Commercial Banks 246 246.5 320.9

Regional Rural Banks 30.5 36.7 52.7

Primary Agricultural Credit Societies 89 102.1 125.8

Urban Co-operative Banks 41.6 42 50

Post Offices 47.5 60.2 60.8

Total 454.6 487.1 610.3

Total Accounts per 100 Persons 51 46 54

Sources of Loans (Per cent of Indebted Earners)

People having Annual Income less than Rs.50,000 bracket

still heavily dependent on money lenders Source: Report on Currency and Finance 2006-08 (IIMS Survey, 2007)

Annual Income Banks

Money Lenders

Other Institutional & Non-Institutional Sources

Total

< 50,000 13.0 34.9 52.1 100

50,000 – 100,000 34.5 19.6 45.9 100

100,000 – 200,000 49.3 12.0 38.7 100

200,000 – 400,000 51.6 11.8 36.6 100

> 400,000 62.8 5.5 31.7 100

Poverty and Microfinance“Poor people borrow some of the time but save all of the

time”

Very PoorPeople who have few (if any) assets – very limited chances to earn money

credit

savings

Entrepreneurial Poor

Self Employed Poor

Laboring Poor

Very Poor

The Poverty Pyramid

Entrepreneurial Poor People who are slightly below the poverty line.

Laboring PoorFarm laborers, domestics and unemployed workers

Self-Employed PoorPoor people who are meeting their basic needs by running microbusinesses

insurance

Microfinance: levels of standards?

R4

R3

R1/ R2

Microfinance = provision of financial services to the poor

48%

15%

37%

Microfinance ????

“Provision of Thrift, Credit and other Financial Services and Products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards”.

The World Bank defines ‘microfinance’ as the financial services provision to the low-income clients, including consumers and the self-employed. These clients are usually borrowers who are considered “un-bankable” by the conventional financial service. Though they may well be people experiencing financial difficulties, in many cases, the repayment rates of loans are high (sometimes as high as 97% .

Microfinance: The fact?

• Micro-credit• Group lending• Social/charitable

activity

• Variety of financial services

• Group and individual lending

• Profitable activity

What it often is? What it really should be?

Microfinance Terminology?

Microcredit – provision of small-scale loans to the poor – and more recently …

Microfinance – provision of a range of the poor’s financial service needs, including credit, savings, insurance, remittance management.

MFIs usually NGOs, but also government bodies, banks etc. Different types and amounts of non-financial inputs – e.g.

skills training, marketing, organisational support, health and education services

How does microfinance work?

• Microfinance offers the services one would expect from any financial institution, including loans, deposits and money transfers, but it lends small amounts to clients that traditional financial institutions would not deem creditworthy. As noted, the most common microfinance product is microcredit loans; ‘micro-loans’ that are typically less than $100 and sometimes as small as $50.

Who are the actors in microfinance?

• Informal financial service providers: moneylenders, pawnbrokers, savings collectors, money-guards, Rotating Savings and Credit Associations, Accumulating Savings and Credit Associations.

• Member-owned organisations: self-help groups, credit unions, hybrid organisations (like ‘financial service associations’ and a self reliant village savings and credit bank

• NGOs (Non-Governmental Organisations): By the end of 2005, there were 3,133 microcredit NGOs lending to about 113 million clients

• Formal financial institutions: commercial banks, state banks, agricultural development banks, savings banks, rural banks and non bank financial institutions.

·

History of Micro-Finance

In the late 1970s the concept of microfinance had evolved. Although, microfinance have a long history from the beginning of the 20th century we will concentrate mainly on the period after 1960. 

Many credit groups have been operating in many countries for several years, for example, the "chit funds" (India), tontines" ( West Africa), "susus" (Ghana), "pasanaku" (Bolivia) etc. Besides, many formal saving and credit institutions have been working for a long time throughout the world. 

Contd…..

During the early and mid 1990s various credit institutions had been formed in Europe by some organized poor people from both the rural and urban areas. These institutions were named Credit Unions, People's Bank etc. The main aim of these institutions were to provide easy access to credit to the poor people who were neglected by the big financial institutions and banks. 

In the early 1970s, few experimental programs had started in Bangladesh, Brazil and some other countries. The poor people had been given some small loans to invest in micro-business. This kind of microcredit was given on the basis of solidarity group lending, that is, each and every member of that group guaranteed the repayment of the loan of all the members. 

Many banks and financial institutions has been pioneering the microfinance program after 1970. These are listed below. 

1. ACCION International: 

This institution had been established by a law student of Latin America to help the poor people residing in the rural and urban areas of the Latin American countries. Today, it is one of the most important microfinance institutions of the world. It's network of lending partner comprises not only Latin America but also US and Africa. 

2. SEWA Bank:In 1973, the Self Employed Women's Association (SEWA) of Gujarat formed a bank, named as Mahila SEWA Cooperative Bank, to access certain financial services easily. Almost 4 thousand women contributed their share capital to form the bank. Today the number of the SEWA Bank's active client is more than 30,000. 

3. Grameen Bank:Grameen Bank (Bangladesh) was formed by the Nobel Peace Prize (2006) winner Dr Muhammad Younus in 1983. This bank is now serving almost 40,00,000 poor people of Bangladesh. Not only that, but also the success of Grameen Bank has stimulated the formation of other several microfinance institutions like, ASA, BRAC and Proshika .

Evolution of Microfinance in India

• Microfinance has been in practice for ages ( though informally).

• Legal framework for establishing the co-operative movement set up in 1904.

• Reserve Bank of India Act, 1934 provided for the establishment of the Agricultural Credit Department.

• Nationalisation of banks in 1969• Regional Rural Banks created in 1975.• NABARD established as an apex agency for rural

finance in 1982.

• Passing of Mutually Aided Co-op. Act in AP in

1995.

Scope and Perspectives of Microfinance

• Over 600,000 villages• Total population – 1.15 billion• 42% are poor (as per revised International

Poverty Line (IPL) of US $ 1.25 (INR 50) per day• 74% of poor live in Rural India – 100 million

Households• 120 million land-holding 65% cropped area

rainfed 1.57 hectare – average land-holding *66% Farmers are Marginal Farmer *51.4% Farmers Financially excluded *27% accessed institutional credit

The scenario

• Estimated that 350 million people live Below Poverty Line

• This translates to approximately 75 million households.

• Annual credit demand by the poor in the country is estimated to be about Rs. 60,000 crores.

• Cumulative disbursements under all microfinance programmes is only about Rs. 5000 crores.(Mar. 04)

• Total outstanding of all microfinance initiatives in India estimated to be Rs. 1600 crores. (March 04)

• Only about 5 % of rural poor have access to microfinance.

Microfinancing

Individualistic Cooperation

Directly People’sParticipation

Indirectly Institutions Solidarity group

Money Lenders

Others GrameenGroup

Common GoalGroup

Self HelpGroups

Cooperatives

Cluster

Federation

JointLiabilityGroup

Investor

•Deposit of Funds•Donation of funds or partial donation

•Repayment of deposit•Interest paid on deposit

Investor

•Deposit of Funds•Donation of funds or partial donation

•Repayment of deposit•Interest paid on deposit

MFI

•Loan delivery•Administration•Accounting •Management of client &investor relations

MFI

•Loan delivery•Administration•Accounting •Management of client &investor relations

Micro Credit Client

• Recipient of Loan• Investment in income producing endeavors

•Income production and capital growth

•Repayment of loan•Plus interest payment

Micro Credit Client

• Recipient of Loan• Investment in income producing endeavors

•Income production and capital growth

•Repayment of loan•Plus interest payment

Basic Micro Finance Model

Basic Question

• Why do we need finance?– credit is an instrument for investment and growth.

• Why the special need for finance for the underserved communities?– Same as above– Shift in Perspective: From poverty alleviation to

wealth generation --- microfinance will enable wealth generation

• Why do poor still go to unorganized financial institutions (money lenders, sahookars, ...)?– We will look at this during the talk

• Why is the spread of microfinance so slow?– Commercial financial institutions are not ready to

enter this arena• Why are commercial banks hesitant to enter

microfinance?– We will explore this in the talk

General Belief

• Poor are too difficult to reach.• Small loans to poor is not a financially viable

proposition• Financial institutions will loose money when they

give microcredit to the poor• Microcredit or micro-loans will only increase the debt

burden for the poor

Microfinance ….. The fact

• A clever scheme for small-savings and small-loan for the underserved community

• A financial service for the poor

• A financial approach empowering the poor

• Microfinance brings in incremental changes– It does not bring in

dramatic changes like the ones that occur when a company goes in for an IPO

• Microfinance may also be considered a tool to give poor people the opportunity to participate fully in economic life

• Will improve the village economy – Facilitate increase in

cash flow– Bring more villages into

the market; monetize more villages

• Help generate trade thru micro-enterprises

Contd…….

• There are an estimated 3,000 microfinance initiatives serving the world's poor – scarcity of money and participation by commercial

financial institutions has limited their expansion. – More than 70 percent of them serve fewer than 2,500

borrowers each. • Only 30 microfinance initiatives have grown to serve

more than 100,000 poor borrowers. – The largest MFI, Grameen Bank in Bangladesh, reaches

more than 3 to 4 million borrowers. – A total of $4 billion has been disbursed since Grameen

started giving loans in 1976 with seed loans starting as small as $35.

Indian context…

• Earliest Initiative– Shri Mahila SEWA (Self Employed Women’s

Association) Sahakari Bank was set up in 1974– Since then, the bank is providing banking services to

the poor self-employed women working as hawkers, vendors, domestic servant etc.

– SEWA bank has 1,75,000 depositors; about 70% from urban area, 30% from rural areas

– The deposit and loan portfolio stood at Rs 623.9 million ($13.86 million) and Rs133.6 million ($2.97 million) respectively.

– Though SEWA mFI is making profit, yet the SEWA bank model of MFI has not been replicated elsewhere in the country

– Very low default rate

Indian context…• Today, there are about

60,000 retail credit outlets of the formal banking sector in the rural areas comprising– 12,000 branches of

district level cooperative banks

– over 14,000 branches of the Regional Rural Banks (RRBs)

– over 30,000 rural and semi-urban branches of commercial banks

– besides almost 90,000 cooperatives credit societies at the village level

• On an average, there is at least one retail credit outlet for about 5,000 rural people

• While there is no published data on private MFIs operating in India, – the number of MFIs is

estimated to be around 800.

– Not more than 10 MFIs are reported to have an outreach of 100,000 microfinance clients.

– An overwhelming majority of MFIs are operating on a smaller scale with clients ranging between 500 to 1500 per MFI.

Target public for MFI

• Rural Poor Women• Asset value less than Rs. 20,000/- • Per capita income is less than Rs. 350/- per

month • Live in poor housing conditions

Different type of Microfinance Institutions

• Institutions that offers financial services to low income people at the prevailing market rates. – Most of these provide microcredit and accept small payments for

saving and repayment of loans. – They do not take saving from the general public. They take

savings from their cliental – mainly the low income group.

• NGOs which are wholly involved in this or partly. The ones partly involved do several other work that is done by an NGO.

• Credit Unions• Private commercial banks• Non-bank financial institutions

Case Study-1: Grameen Bank

Venture Start…..Origins

• Founded by Dr. Mohammed Yunus in 1976 in Jobra village in Bangladesh

• Began with lending $27 to 42 families – Were forced to borrow under oppressive

terms (dadan system) – Considered non-creditworthy by

traditional banks– $300 capital secured from Janata Bank

with Dr. Yunus as guarantor

Why Lend to Women?97% of Grameen Bank’s borrowers are women

• Benefits reach the family more directly– Dr. Yunus: “When a destitute mother starts making

some income, her dreams invariably center around her children ”

• Women are often the worst affected by poverty – they are left totally insecure and have few opportunities– Have more at stake, and given the smallest opportunity

are willing to work extra hard– Adapt quicker to self-help groups

• Boosts self-confidence of women • Gender equality key to socio-economic development• Higher repayment rates than loans to men

Challenges with lending to women• Hard to reach women overcoming societal barriers like

purdah system• Handle conflict within the family when the woman is

designated to hold purse-strings• Support system to help women

How Grameen Bank Works - I

Grameen Bank5 member groups

Centers made of upto 8 groups

Group fund for emergencies

Repayment•One year loans•Equal weekly installments•Repayment starts 1 week after loan

•No offices

•Trained women bank workers who live with the poor

•90% owned by borrowers

•Organizes workshops

•Established Sixteen Decisions as guidelines to give meaning to lives of borrowers

•Grameen is not just a lender – Sixteen Decisions make it a close partner in improving the living standards of the poor

•Relationship built on trust - 99% repayment rate

Analysis of Grameen

Achievements• 99% repayment rate• Improved status of

exploited women in Bangladesh

• Helped in economic development of small villages

• Reached out idea of microcredit to other countries as well.

Issues / Continuing problems

Changing the mind-set of people in villages

High interest rates for micro loans.

Ineffective measures to tackle problems of interest rate.

Case Study-2: Kudumbashree

KUDUMBASHREE- truth

• A multifaceted women based poverty reduction programme

• Jointly initiated by Government of Kerala and NABARD.

• Scaled up from two UNICEF assisted initiatives in Alappuzha Municipality (UBSP) and Malappuram district (CBNP)

• Implemented by Community Based Organizations(CBOs) of Poor women in co-operation with LSG Institutions

How Kudumbashree Works…

• Identification of beneficiaries• Pooling like-minded individuals into self-help

groups, thus giving it a community based organization (CBO) Neighborhood groups (NHG) - One woman

each from 15 – 40 families at risk Area Development Society (ADS)-

Federation of all NHGs in a ward Community Development Society (CDS)-

The Apex body at the Local Body Level

Neighborhood Groups

Area Development

Society

Area Development Society

Community Development Society

How Kudumbashree Works (cont’d)

• Initially, groups collect money for use by needy member and maintain finances.

• This process assessed by bank.• Bank account created for future loans and savings.

(Microloans)• Repayment within stipulated time• Special vocational training administered.• Microenterprise set up• Development: Gender empowerment, improved

standard of living

Group action to access services, resources and against social evils

Micro-enterprisesMicro-enterprises

Resource assessment-prioritization of needs-Implementation of action plan

Problem Identification, need Assessment-Micro-plan

Day-to-day management and financial management

Collection of saving, Micro Credit & Repayment monitoring

Regular weekly meetings and sharing of information

Women Empowerment

Flight of steps to success

Some initiatives undertaken by Kudumbashree

• Health enterprise: Santhwanam• Lease land farming: Harithashree• Microhousing: Bhavanashree• Microenterprises- Garment manufacture, solid waste

management, mosquito eradication• Destitute rehabilitation: Ashraya

Analysis of Kudumbashree

Achievements• Successfully reached

out to many women living below the poverty line

• Initiated and carried out numerous developmental projects in different areas

• Reduced the gap between rich and the poor by improving the latter’s economic status

Issues / Continuing problems

Complicated organizational system leading to rift between higher authorities and groups at grassroots level

Longer repayment period might lead to psychological tendency to hold on to money for longer

Comparing and Contrasting Grameen Bank & Kudumbashree

Grameen Bank

Only basic organisation into groups of 5

More bank-customer interaction

No vocational training provided

Short repayment period

High interest rate

Kudumbashree

3-tier community based organization

Bank interaction more at higher level of organization

Vocational training provided for set up of micro enterprise

Relatively longer repayment period

Relatively lower interest rate

Micro-Credit Client takes loan of USD 80 to buy two goats. Fortnightly payments (incl. interest) of USD 3.50. Completed repayment within one year. Goats give birth during year, yearly income from sale of USD 80 plus goats as asset. Thus now has capital and future income production. Plus self-confidence!

Micro-Credit Client takes loan of USD 150 to set up small roadside shop. Fortnightly payments (incl. interest) of USD 6.50. Completed repayment within one year. Shop produces weekly income of USD 16.50. At year end net profit approximately USD 400, plus shop & stock on hand. Thus now has capital and income production, and, increased self-esteem.

Example of Micro Credit Loans

• Provision of Microfinance, and specifically, Microcredit, changes lives - dramatically.

• It provides individuals and families with tools to help themselves. ‘give the net, not the fish’

• It is empowering and contributing to increased well-being and happiness of individuals and families.

• It contributes to the overall GDP and economic health of the country.

• It stimulates creativity and initiative, thus reducing social and civil unrest.

• A clear WIN-WIN Solution: Everyone benefits!!

Final Summary

Thanks

Write me

akdwivedi@ediindia.org