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Thesis Proposal

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  • 1. Dissertation 2009 Microfinance and Urban Poor: Case of Ahmedabad Submitted by Anuradha Naulakha URP 0207 Guide Name: Dr. Darshini Mahadevia Urban and Regional Planning Faculty of Planning and Public Policy, CEPT University
  • 2. MICROFINANCE AND THE URBAN POOR: A CASE OF AHMEDABAD 10/11/2008 Anuradha Naulakha, URP 0207, Dissertation Proposal, Guide: Dr. Darshini Mahadevia
  • 3. MICROFINANCE AND THE URBAN POOR: A CASE OF AHMEDABAD 10/11/2008 Introduction What is Micro credit? In developing countries, today, micro enterprise is making important contribution to economic output and employment. Approximately 30% of employment in underdeveloped and developing country is generated by informal sector and about 18% by Small and medium sized enterprises (World Bank) These small (micro) enterprises find it difficult to raise capital, as the lender (institution or individual) may not find the return from such an investment as profitable as compared to from investment in large enterprises. In addition, investors are also skeptical about repayment from a small enterprise. To address these challenges to small businesses, concept of Microcredit came into picture which would cater to the large clientele in developing world. Micro credit and Micro finance-Difference Microcredit is the extension of very small loans (micro loans) to the unemployed, to poor entrepreneurs and to others living in poverty who are not considered bankable. These individuals lack collateral, steady employment and a verifiable credit history and therefore cannot meet even the most minimal qualifications to gain access to traditional credit. To ensure that the poor not only have access to credit but other financial services, microcredit has expanded over the years to include a variety of financial products such as savings, insurance, transfer payments, and even micro-pensions. Hence, Microcredit is a part of microfinance, which is the provision of a wider range of financial services to the very poor. 1 Microfinance and microcredit do not provide consumers with loans to simply increase their consumption; instead, they provide loans for the specific purpose of creating self-employment for the poor, thereby enabling the poor to build their own microenterprises and move themselves out of poverty. In short, microfinance is an income producing tool rather than a consumption aid. Micro Finance 1 (Marge Magner, March 2007) Anuradha Naulakha, URP 0207, Dissertation Proposal, Guide: Dr. Darshini Mahadevia
  • 4. MICROFINANCE AND THE URBAN POOR: A CASE OF AHMEDABAD 10/11/2008 In essence microfinance is not very much different from the mainstream commercial finance operations but because microfinance serves a totally different client segment, which is poor, they have to address the challenges that arise from their clients dire circumstances. Few challenges that any poor faces are health, lack of housing, lack of education, access to basic necessities, and unexpected threats such as natural disasters that endanger their lives. Influence of these factors on individuals’ economic ability cannot be ignored. MFI Products focus on these kinds of issues to reduce poverty. Some of the issues that have an impact on poverty are: Health: Ill health and sickness are one of the few reasons why poor have not been able to pull out of poverty. Death of a bread earner leaves the household helpless. Their earning is limited and one member falling sick can make the household unstable. Food security: Food security may not be considered as an important factor because now we mostly look at poor who are ready for microfinance and hunger is not main concern. In cases such as Grameen bank’s Struggling Members Program (commonly known as Beggars program) where the participant are from the poorest class for who hunger is most critical issue. BRAC through their IGVGD (Income Generation for Vulnerable Groups Development Program), which is a collaboration with World Food Program seeks to provide food security to their participants. IGVGD provides free grains and skill training for 18 months after which participant in groups receive loans to fund their income generating activities. BRAC also incorporates healthcare and family planning into its products. Program has served 1.6 million women among whom two third have been able to escape the absolute poverty Education: Education is a vital component of a microfinance service; it allows participants to manage their growing income generating activities. In absence of appropriate support and education it is seen that participant are unable to make financial decisions and overtime are in danger of incurring losses forcing them back into Anuradha Naulakha, URP 0207, Dissertation Proposal, Guide: Dr. Darshini Mahadevia
  • 5. MICROFINANCE AND THE URBAN POOR: A CASE OF AHMEDABAD 10/11/2008 poverty. Provision for adult literacy and financial training are very important parts of a microfinance product. Housing: Housing helps create asset for the poor. Investment in housing is investment in business since poor women do work from home. Housing gives access to many basic services to the poor. Vulnerability: Poor not only suffer from low incomes but also from severe and often sudden dispossession. Certain events drive down their existing income levels E.g. illness, death, theft of asset, marriage, etc. There are 3 factors that contribute to vulnerability: structural factors, crisis factors, life-cycle factors. Then there are other deprivations that make it difficult for poor to come out of poverty like powerlessness, social inferiority, discrimination, gender issues, disability, old age. Micro finance service providers in India: 1. Informal Sector: money lenders, pawnshops, loans from relatives, friends,etc 2. NGO, MFI’s: these extend microfinance to poor by forming Groups. E.g Grameen model (see JLG below) 3. SHG-Bank Linkages: could have an NGO as an intermediary. (See Self help groups below). NABARD proposes to link 1 million SHG’s to banks by 2008. The two models of group lending: 1. JLG (Joint liability group). 2. SHG (Self help group). JLG (Joint Liability Group): Potential clients are asked by the MFI to organize themselves into groups. The members individually make regular savings and take regular loans. They each have individual savings and loan accounts. This model is pioneered in Bangladesh and is based on Grameen bank model. The main purpose of JLG is to facilitate mutual guaranteeing and execution of a joint liability Anuradha Naulakha, URP 0207, Dissertation Proposal, Guide: Dr. Darshini Mahadevia
  • 6. MICROFINANCE AND THE URBAN POOR: A CASE OF AHMEDABAD 10/11/2008 making members jointly liable for interest payment + loan repayment obtained from MFI. SHG: The group formation process may be facilitated by an NGO or by a bank itself. Members start making individual savings and lend by earning interest decided by the group. SHG opens a savings account with bank to deposit the savings and soon qualifies to take loans. This loan is used by the group to supplement its own funds for on lending to its members. Relevance of Study: India has nearly 400 million people living below or just above the poverty line. Approximately, 75 million households need micro finance and of this, 15 million are urban slum dwellers (Sriram 2002) Microfinance claims to provide the poor an access to capital giving them opportunity to climb the economic ladder. A close examination of few microfinance operations around the world has indicated that very small fraction of poor who use the microfinance products are able to uplift themselves from poverty, and even those who do manage to escape poverty take 5 to 10 years at an average. 2 India is fast becoming one of the largest micro finance markets in the world even then; the link between micro finance and poverty alleviation is not proven. Impact assessment is necessary to understand the outreach and effectiveness of micro finance in meeting development objectives. Also, it is important to understand that Micro finance services are an instrument of development and not an end in themselves. For most, if not all, actors in India-NGO’s, MFO’s, donors, even bankers- Micro finance is not only about the efficient and sustainable delivery of micro-financial services. The ultimate goal is to reduce poverty. Hence, it is important to understand:  What changes does microfinance lead to?  Do they move poor people out of poverty?  How are the various products contributing to poverty reduction?  What are the impacts of Micro finance on-  Income 2 Marge Magner, Microfinance a platform for social change, Grameen Bank Publication, March 2007 Anuradha Naulakha, URP 0207, Dissertation Proposal, Guide: Dr. Darshini Mahadevia
  • 7. MICROFINANCE AND THE URBAN POOR: A CASE OF AHMEDABAD 10/11/2008  Employment (male, female)  empowerment of women  asset creation  housing  reducing vulnerability  education (Boys, Girls)  Health Research Question Does micro finance lead to overall development and pull households out of poverty? Aim To assess the extent to which Microfinance reduces urban poverty For this research, Ahmedabad has been selected as a case study. In Ahmedabad, almost 26% of city’s population accounts for slum population. Although quite a significant proportion of the poor is above the traditional poverty line, they do suffer from other deprivations. The share of employment in informal sector was 77% and it generated 47% of the total city income (CDP, Ahmedabad). This means that the poor contribute to the economy of Ahmedabad as much as the non-poor. But the poor do so without receiving the due economic or other civic facilities or services at par with the non-poor. Objectives  To study the broad spectrum of microfinance products and services in the area  To analyze the current living conditions of urban poor  To measure impacts of various products on the poor with regards to Housing, Income generation, health, education, employment, reducing vulnerability, etc  To understand the time scale that is needed for any change to take place Scope The study area is limited to few identified slums in urban areas (Limited to Ahmedabad) Anuradha Naulakha, URP 0207, Dissertation Proposal, Guide: Dr. Darshini Mahadevia
  • 8. MICROFINANCE AND THE URBAN POOR: A CASE OF AHMEDABAD 10/11/2008 Methodology The Methodology is divided into 3 broad stages: • Stage 1 of the research work will include an understanding of the existing Microfinance products by meetings with the Microfinance institutions. Consultation with different levels of stakeholders on their objectives and priorities will be done and their impact hypothesis will be explored. Also, the indicators that are relevant to them will be understood. These meetings will also help in identifying the MFI beneficiaries who will then be identified geographically. The locations with maximum beneficiaries will be selected for further studies which will, then, lead to identification of sample (clients) to be used for various analysis. A number of meetings with MFI, at this stage, would be required. An attempt to include different classes of poor and the impact of different products on them will be made. For this purpose, Representative sampling will be used here. • Stage 2 is based on qualitative studies and analysis. Here the history of interventions by MFI / Government in the study area and their Impacts would be studied. The current living conditions of the clients will be analyzed with help of case studies, focus group discussions, etc and if any difference has occurred in recent past. i.e. ‘without microfinance’ and ‘with microfinance’ differences for the clients will be studied. This stage will also help understand the time frame that is required for any impact to happen. This stage will include questionnaires, discussions with clients, perception studies. • Final stage will include quantitative measurements of the impacts of microfinance on poverty reduction. Here, comparison between certain indicators (based on products) for the Clients and a “control group” of non- clients will be studied. Data will be analysed through cross tabulation and statistical tools such as regression analysis, etc. Anuradha Naulakha, URP 0207, Dissertation Proposal, Guide: Dr. Darshini Mahadevia
  • 9. MICROFINANCE AND THE URBAN POOR: A CASE OF AHMEDABAD 10/11/2008 Possible chapters 1. Introduction  Need of the study  Aim, Objectives, scope, Methodology 2. Review of Existing Policy situations and institutional structure  Existing governmental policies  Existing MFI: their background and what they do, study of existing products 3. Introduction to the City and existing poverty situation 4. Findings from surveys  Impact of mf on economic conditions  Impact of mf on the living conditions 5. Conclusion and recommendations References: • Anderson, Lykke Eg, "Micro credit and Group Lending: The collateral Effect." Institute for Socio-Economic Research • Kota, Ina, "Microfinance: Banking for the Poor", Finance and Development, 2007 • Magner, Marge, "Microfinance a platform for social change", Grameen bank, 2007 • Mitra, Subrata Kumar, "Asking Price of Microfinance loan to poor borrowers", Vol. Paper no. 191, Institute of Rural Managemnet, Anand • Mosley, David Hulme and Paul, "Finance Against Poverty", Vol. 1. London and New York: Routledge, 1996 • "Role of Micro Finance for poor", FWWB • Sriram, Thomas Fisher and M.S, "Beyond Micro Credit: Putting Development back into Micro Finance", New Delhi: Vistaar Publications, 2002 • Yunus, Muhammad with Alan Jolis, "Banker to the Poor: The story of the Grameen Bank", London: Penguin Group, 2007 • AMC and AUDA with CEPT University, "City Development Plan", Ahmedabad: JNNURM, 2006-12 Anuradha Naulakha, URP 0207, Dissertation Proposal, Guide: Dr. Darshini Mahadevia
  • 10. MICROFINANCE AND THE URBAN POOR: A CASE OF AHMEDABAD 10/11/2008 Possible chapters 1. Introduction  Need of the study  Aim, Objectives, scope, Methodology 2. Review of Existing Policy situations and institutional structure  Existing governmental policies  Existing MFI: their background and what they do, study of existing products 3. Introduction to the City and existing poverty situation 4. Findings from surveys  Impact of mf on economic conditions  Impact of mf on the living conditions 5. Conclusion and recommendations References: • Anderson, Lykke Eg, "Micro credit and Group Lending: The collateral Effect." Institute for Socio-Economic Research • Kota, Ina, "Microfinance: Banking for the Poor", Finance and Development, 2007 • Magner, Marge, "Microfinance a platform for social change", Grameen bank, 2007 • Mitra, Subrata Kumar, "Asking Price of Microfinance loan to poor borrowers", Vol. Paper no. 191, Institute of Rural Managemnet, Anand • Mosley, David Hulme and Paul, "Finance Against Poverty", Vol. 1. London and New York: Routledge, 1996 • "Role of Micro Finance for poor", FWWB • Sriram, Thomas Fisher and M.S, "Beyond Micro Credit: Putting Development back into Micro Finance", New Delhi: Vistaar Publications, 2002 • Yunus, Muhammad with Alan Jolis, "Banker to the Poor: The story of the Grameen Bank", London: Penguin Group, 2007 • AMC and AUDA with CEPT University, "City Development Plan", Ahmedabad: JNNURM, 2006-12 Anuradha Naulakha, URP 0207, Dissertation Proposal, Guide: Dr. Darshini Mahadevia