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Micro credit


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Micro-Finance: A Tool to Empowerment & Development

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Micro credit

  1. 1. Micro-Finance: A Tool to Empowerment & Development Dr. Amit K. DwivediEntrepreneurship Development Institute of India Gandhinagar, Gujarat
  2. 2. Number of Savings Accounts (Million)Institution / End-March 1993 2002 2007Scheduled Commercial Banks 246 246.5 320.9Regional Rural Banks 30.5 36.7 52.7Primary Agricultural Credit Societies 89 102.1 125.8Urban Co-operative Banks 41.6 42 50Post Offices 47.5 60.2 60.8Total 454.6 487.1 610.3Total Accounts per 100 Persons 51 46 54 Total Accounts per 100 persons still too less. Source: Report on Currency and Finance 2006-08
  3. 3. Sources of Loans (Per cent of Indebted Earners)Annual Income Banks Money Other Institutional & Total Lenders Non-Institutional Sources< 50,000 13.0 34.9 52.1 10050,000 – 100,000 34.5 19.6 45.9 100100,000 – 200,000 49.3 12.0 38.7 100200,000 – 400,000 51.6 11.8 36.6 100> 400,000 62.8 5.5 31.7 100 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)
  4. 4. Poverty and Microfinance “Poor people borrow some of the time but save all of the time” Entrepreneurial Poor Peopl w ae sl l bel t poveryl e ho r ighty ow he t ine. Entrepreneurial Poor credit insurance Self-Employed Poor Poorpeopl w ae meeting t ba needs byr e ho r heir sic unning Self Employed Poor microbusinessessavings Laboring Poor Laboring Poor F r l bor s, domest a unempl w ker am a er ics nd oyed or s Very Poor Very Poor Peopl w ha e few(ifa a s – ver l ed cha t e ho v ny) sset y imit nces o ean money r The Poverty Pyramid
  5. 5. Microfinance: levels of standards? R1/ 15% R2 R3 37% R4 48%Microfinance = provision of financial services to the poor
  6. 6. Microfinance ????“Provision of Thrift, Credit and other FinancialServices and Products of very small amounts to thepoor in rural, semi-urban or urban areas forenabling them to raise their income levels andimprove living standards”. The World Bank defines ‘microfinance’ as thefinancial services provision to the low-incomeclients, including consumers and the self-employed.These clients are usually borrowers who areconsidered “un-bankable” by the conventionalfinancial service.Though they may well be people experiencingfinancial difficulties, in many cases, the repaymentrates of loans are high (sometimes as high as 97% .
  7. 7. Microfinance: The fact?What it often is? What it really should be?• Micro-credit • Variety of financial• Group lending services• Social/charitable • Group and individual activity lending • Profitable activity
  8. 8. 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
  9. 9. 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.
  10. 10. 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.
  11. 11. History of Micro-FinanceIn the late 1970s the concept of microfinance hadevolved. Although, microfinance have a longhistory from the beginning of the 20th century wewill concentrate mainly on the period after 1960. Many credit groups have been operating in manycountries for several years, for example, the "chitfunds" (India), tontines" ( West Africa), "susus"(Ghana), "pasanaku" (Bolivia) etc. Besides, manyformal saving and credit institutions have beenworking for a long time throughout the world. 
  12. 12. Contd…..During the early and mid 1990s various creditinstitutions had been formed in Europe by someorganized poor people from both the rural andurban areas. These institutions were named CreditUnions, Peoples Bank etc. The main aim of theseinstitutions were to provide easy access to creditto the poor people who were neglected by the bigfinancial institutions and banks. In the early 1970s, few experimental programs hadstarted in Bangladesh, Brazil and some othercountries. The poor people had been given somesmall loans to invest in micro-business. This kindof microcredit was given on the basis of solidaritygroup lending, that is, each and every member ofthat group guaranteed the repayment of the loan ofall the members. 
  13. 13. 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. Its network of lending partner comprises not only Latin America but also US and Africa. 2. SEWA Bank: In 1973, the Self Employed Womens 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 Banks 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 .
  14. 14. 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.
  15. 15. 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
  16. 16. 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.
  17. 17. MicrofinancingIndividualistic CooperationDirectly People’s Indirectly Institutions Solidarity group Participation Money Others Grameen Common Goal Joint Lenders Group Group Liability Group Self Help Cooperatives Groups Cluster Federation
  18. 18. Basic Micro Finance Model Investor Micro Credit MFI Client•Deposit ofFunds •Loan delivery • Recipient of Loan•Donation of •Administration • Investment infunds or •Accounting income producingpartial •Management endeavorsdonation of client &investor •Income production relations and capital growth•Repayment ofdeposit •Repayment of loan•Interest paid •Plus intereston deposit payment
  19. 19. 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
  20. 20. 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
  21. 21. Microfinance ….. The fact• A clever scheme for small- • Microfinance may also be savings and small-loan for considered a tool to give the underserved poor people the community opportunity to participate• A financial service for the fully in economic life poor • Will improve the village• A financial approach economy empowering the poor – Facilitate increase in• Microfinance brings in cash flow incremental changes – Bring more villages into the market; monetize – It does not bring in more villages dramatic changes like the ones that occur when a • Help generate trade thru company goes in for an micro-enterprises IPO
  22. 22. Contd…….• There are an estimated 3,000 microfinance initiatives serving the worlds 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.
  23. 23. 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
  24. 24. Indian context…• Today, there are about • While there is no published 60,000 retail credit outlets data on private MFIs of the formal banking sector operating in India, in the rural areas comprising – the number of MFIs is estimated to be around – 12,000 branches of 800. district level cooperative banks – Not more than 10 MFIs are reported to have an – over 14,000 branches of outreach of 100,000 the Regional Rural microfinance clients. Banks (RRBs) – An overwhelming – over 30,000 rural and majority of MFIs are semi-urban branches of operating on a smaller commercial banks scale with clients – besides almost 90,000 ranging between 500 to cooperatives credit 1500 per MFI. societies at the village level• On an average, there is at least one retail credit outlet for about 5,000 rural people
  25. 25. 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
  26. 26. 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
  27. 27. Case Study-1: Grameen Bank
  28. 28. 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
  29. 29. 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 menChallenges 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
  30. 30. How Grameen Bank Works - I5 member groups Grameen Bank Group fund for •No offices emergencies •Trained women bank workers who live with the poor •90% owned by borrowers •Organizes workshops Repayment •Established •One year loans Sixteen •Equal weekly installments Decisions as guidelines to give •Repayment starts 1 week meaning to lives after loan of borrowers •Grameen is not just a lender – Sixteen Decisions make it a close partner in improving the living standards of the poorCenters made of upto 8 groups •Relationship built on trust - 99% repayment rate
  31. 31. Analysis of GrameenAchievements Issues / Continuing problems• 99% repayment rate• Improved status of  Changing the mind- exploited women in set of people in villages Bangladesh  High interest rates for• Helped in economic micro loans. development of small  Ineffective measures to tackle problems of villages interest rate.• Reached out idea of microcredit to other countries as well.
  32. 32. Case Study-2: Kudumbashree
  33. 33. 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
  34. 34. 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
  35. 35. Area Development SocietyNeighborhood Groups Area Development Society Community Development Society
  36. 36. 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
  37. 37. Flight of steps to success Women Empowerment Group action to access services, resources and against social evils Micro-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
  38. 38. 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
  39. 39. Analysis of KudumbashreeAchievements Issues / Continuing• Successfully reached out problems to many women living  Complicated below the poverty line organizational system leading to rift between• Initiated and carried out higher authorities and numerous developmental groups at grassroots level projects in different areas  Longer repayment period• Reduced the gap between might lead to rich and the poor by psychological tendency improving the latter’s to hold on to money for economic status longer
  40. 40. Comparing and Contrasting Grameen Bank & Kudumbashree Grameen Bank Kudumbashree  Only basic 3-tier community organisation into based organization groups of 5 Bank interaction more More bank-customer at higher level of interaction organization No vocational training Vocational training provided provided for set up of micro enterprise Short repayment period Relatively longer repayment period High interest rate Relatively lower interest rate
  41. 41. Example of Micro Credit LoansMicro-Credit Client takes loan of USD 80 tobuy two goats. Fortnightly payments (incl.interest) of USD 3.50. Completed repaymentwithin one year. Goats give birth during year,yearly income from sale of USD 80 plus goatsas asset. Thus now has capital and futureincome 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.
  42. 42. Final Summary• 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!!
  43. 43. Thanks Write