Micro-Finance: A Tool to Empowerment & Development

1. Micro-Finance: A Tool to
Empowerment & Development
Dr. Amit K. Dwivedi
Entrepreneurship Development Institute of India
Gandhinagar, Gujarat

2. Number of Savings Accounts
(Million)
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
Total Accounts per 100 persons still too less.
Source: Report on Currency and Finance 2006-08

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 52.1 100
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
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. 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 microbusinesses
savings
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. Microfinance: levels of standards?
R1/
15% R2
R3
37%
R4
48%
Microfinance = provision of financial services to the poor

6. 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% .

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. 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. 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. 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. 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.

12. 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.

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. 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 .

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. 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

17. 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.

18. Microfinancing
Individualistic Cooperation
Directly People’s Indirectly Institutions Solidarity group
Participation
Money Others Grameen Common Goal Joint
Lenders Group Group Liability
Group
Self Help Cooperatives
Groups
Cluster
Federation

19. Basic Micro Finance Model
Investor Micro Credit
MFI Client
•Deposit of
Funds •Loan delivery • Recipient of Loan
•Donation of •Administration • Investment in
funds or •Accounting income producing
partial •Management endeavors
donation of client
&investor •Income production
relations and capital growth
•Repayment of
deposit •Repayment of loan
•Interest paid •Plus interest
on deposit payment

20. 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

21. 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

22. 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

23. 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.

24. 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

25. 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

26. 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

27. 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

30. Case Study-1: Grameen Bank

31. 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

32. 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

33. How Grameen Bank Works - I
5 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 poor
Centers made of
upto 8 groups •Relationship built on trust -
99% repayment rate

34. Analysis of Grameen
Achievements 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.

35. Case Study-2: Kudumbashree

36. 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

37. 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

38. Area Development Society
Neighborhood Groups
Area Development Society Community
Development Society

39. 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

40. 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

41. 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

42. Analysis of Kudumbashree
Achievements 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

43. 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

44. Example of Micro Credit Loans
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.

45. 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!!

46. Thanks
Write me
akdwivedi@ediindia.org