A Thesis on

A general study on micro finance. Its positives and negatives

to society.

By

CHINMAYA H P

IUD NO 0801214200

A report submitted in partial fulfillment of

the requirements of

THE MBA PROGRAM

(The Class of 2010)

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 CERTIFICATE

This is to certify that the Management Thesis titled ___________________________________

______________________________________________________________________submitte

d during Semester _________________ of the MBA Program (The Class of 2010) embodies

original work done by me.

Signature of the Student

Name (in Capitals) :______________________________________________________

Enroll Number : ______________________________________________________

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 ICFAI NATIONAL COLLEGE
FIRST FLOOR SONA HONDA
BH ROAD SHIMOGA
Ref number: date:

EXAMINER’S CERTIFICATION

The project report of

CHINMAYA H P.

A general study on micro finance. Its positives and negatives

to society.

is approved and is acceptable in quality and form

Campus head

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 DECLARATION

I here by declare that the thesis entitled

“A general study on micro finance. Its positives and negatives

to society”

Submitted in partial fulfillment of the assignments for the degree of

Master of Business Administration

To ICFAI National College Shimoga. It is my original work and not submitted for
the award of any other degree, diploma, fellowship, or any other similar title or
prizes.

Place: SHIMOGA (CHINMAY HP)

Date: IUD No: 0801214200

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 ACKNOWLEDGEMENT

First, I would like to thank The Almighty for his perpetual blessings and guidance
through out this thesis work.

I express my deep sense of gratitude to our Campus head and the faculty guide for
this thesis work MR. Ramachandra Gunari, ICFAI national college shimoga, for
providing me an opportunity and continuous encouragement for doing this thesis.
His suggestions benefited immensely. Further, he also provided me with valuable
inputs and guidance in writing this project.

I thank all the staff of Dharmastala SIRI Gramodyoga samasthe[R], for their
valuable guidance, and also I would like to thank “Pragathi” and all other self help
group for the valuable information, co-operation and support, which has been a
major contributing factor in the completion of this thesis.

I also like to remember and thank all the respondents who cooperated and
answered all my questions with patience.

Last but not the least, I thank my family and well wishers for their encouragement
and support who have stood by me during this project.

CHINMAYA.H.P

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 CONTENTS

1. Introduction………………………………………………….………………………………………09

1.1 Micro credit.....................................................................................12

1.2 Self help groups……………………………………………….…..…………………..12

1.3 Grameen bank groups………………………..………………..………….………….13

1.4 Why Grameen in Bangladesh and SHGs in India………..……………….14

1. Literature review…………………………………………………………………………………..18

2. Objectives……………………………………………………………………………………………..25

3. Research design and methodology………………………………………………………..26

4. Methodology of research……………………………………………………………………..27

5. Data collection………………………………………………………………………………………27

6. Scope of the study…………………………………………………………………………………28

7. Theoretical framework…………………………………………………………………………30

8.1. Difference between conventional banking and microfinance

banking…………………………………………………………………………………….31
8.2. Between micro credit and microfinance……………………………………..33
8.3. Impact of microfinance on poverty…………………………………………….33
8.4. Microfinance clients………………………………………………………………….34
8.5. Micro finance for the economically active poor…………………………35
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 8.6. Main micro financing programs…………………………………………………36
8.7. Significance of microfinance institutions……………………………………37
9. Leading views on microfinance………………………………………………………………39
9.2. Poverty lending approach…………………………………………………………..39
9.3. Financial systems approach…………………………………………………………40
9.4. Sustainability of the micro finance programs………………………….…40
9.5. Supply lending & poverty lending approach………………………………42
9.6. Demand driven and financial system approach……………………….…44
9.7. Target market………………………………………………………………………………45
9.8 objectives of the micro finance institutions…………………………………46
10. Impacts……………………………………………………………………………………………..48
10.1. Moral hazards……………………………………………………………………………48
10.2. Mandatory savings……………………………………………………………………48
10.3. Cash flows…………………………………………………………………………………49
10.4. Social collateral………………………………………………………………………49

11. Discussions and implications……………………………………………….……………….51

12. Negatives and critics about MFIs……………………………………..………………….59

12. Micro finance: challenges ahead………………………………………….………………63

13. Conclusion………………………………………………………..……………….………………..65

14. References ………………………………………………………………………….….……………68

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CHAPTER - I

Introduction

1.1 Micro credit

1.2 Self help groups

1.3 Grameen groups

1.4 Why Grameen in Bangladesh and SHGs in India

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1. INTRODUCTION:

Kofi Annan said,

“Let us be clear: micro finance is not the charity. It is the way to extend the
same rights and resources to low income households that are available to
everyone else. It is recognition that poor people are the solution, not the
problem. It is way to build their ideas, energy and vision. It is a way to grow
productive enterprise and to allow communities to prosper”

We can say poverty in India is predominantly rural in character. Micro

finance is one of the many ways to help in increasing the incomes and eradicating
poverty in rural side. Fighting poverty is one of the core objectives of the
Millennium Development Goals. Micro Finance is the best way to eradicate
poverty and to empower people. Micro finance is the newly emerging financial
industry. It has the target market of more than 1.8 billion people in the whole
world.

The microfinance institutions have a pivotal role to play in a society marked

by economic classes. By providing small loans to poor people, these institutions
attempt to provide remedies to the woes of the deprived class. Apart from this, it
is through these institutions that poor people are able to avail small loan facilities
on reasonable terms and interest rates. In the absence of these institutions the
poor people are more likely to fall prey to the exploitation of money lenders, who
are more likely to exploit the poor masses by providing loans on enormously high
rates.

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 We can see many number of self help group across. Serving micro credit
facilities is the main purpose of this self help groups. These groups has served
nearly 33 million Indians till now as per the statistics given from the government
side and in that, 4 out of 5 microfinance clients in India are women. It means
micro finance is helping the women and making them empowered for the better.

Still micro finance has some bad remarks and negatives regarding its
activities. As per the different articles and other different sources, they say micro
finance is sucking the blood of poor by charging extremely high interest rates and
other charges. As different articles say like, Micro-finance institutions on a looting
spree, making profits from poverty. Poverty has literally become a big and
organized business. If you are educated, and looking for a profitable business
enterprise, and more so if you are a non-resident Indian and want to translocate
to India and still make millions, micro-finance offers you the right avenue.

By looking over these aspects I decided to make a general study on what

exactly is a micro finance and what the micro credit institution does and how do
they work in the society and many other things regarding this micro finance
aspects.

The Nobel Prize committee awarded the 2006 Nobel Peace Prize to
Muhammad Yunus and the Grameen Bank “for their efforts to create economic
and social development from below.” The microfinance revolution has come a
long way since Yunus first provided financing to the poor in Bangladesh.
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The committee has recognized microfinance as “an important liberating force”
and an “ever more important instrument in the struggle against poverty.”

Almost a decade has passed that the micro finance institutions have started
working properly after the micro finance ordinance. A number of the Bank’s
emerged in the market providing micro financial services in different cities of
India. Some Non Governmental Organizations (NGO’s) like Shri Dharmastala SIRI
Gramodyoga samasthe[R] etc... And their support programmes upgraded
themselves and started delivering micro loans to the different clusters of the
population as part of their service.

Even some of the institutions are providing only the micro credit services.
What ever but still they are in providing services. Majorly, these NGOs and the
Microfinance Institutions were working under the umbrella of the govt too. Here
micro finance can be defined simply as, it is defined as formal scheme designed to
improve the well being of poor through better access to saving and services loans.
Micro finance is not simply a way for micro credit but it is something beyond that.

When we pay attention towards microfinance, we come across micro

credit, self help groups, Grameen bank groups etc... So let us see what these sub
branches of micro finance are.

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1.1 Micro credit:

Microfinance is the provision of a wider range of financial services to

the very poor and Micro credit is one of the services offered by microfinance
Institutes. As mentioned in the definition of Microfinance. Micro credit is very
small loan given to the poor which are considered unbankable. These people are
usually unemployed or poor entrepreneurs. They lack collateral, steady
employment and a verifiable credit history and therefore cannot meet even the
most minimal qualifications to gain access to traditional credit. Micro credit is a
part of microfinance, which is the provision of a wider range of financial services
to the very poor.

1.2 Self help groups:

A typical Self help group consists of twelve to thirty members. The group is
not merely a savings and loan association, but serves as a similar group that
provides a platform for a range of issues such as progress and development,
awareness building, and family planning. An SHG meets regularly often weekly,
and in these meetings, members contribute savings and take decisions on loans to
members of the group. Group leadership is by rotation. The SHG may initially lend
out of its own pool of funds and after gaining some experience with lending (and
recovering loans), it may borrow from a micro credit institutions for lending to
members. The overall concept of micro finance is standing on self help groups and
the NGOs who are providing the services for these groups.

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1.3 Grameen bank groups:

Grameen bank group system actually started in Bangladesh and still its in
existence with Bangladesh. In most of the other countries has adopted the system
of self help group system but in Bangladesh, the Bangladesh Grameen bank
supports opening of this type of groups. Both groups are similar in the way.

Potential clients are asked by the MFI to organize themselves into ‘Groups’
of five members which are in turn organized into ‘Centers’ of around five to seven
such Groups. The members make regular savings with the MFI, according to a
fixed compulsory schedule, and they also take regular loans. They each have
individual savings and loan accounts with the MFI, and the main function of the
Groups and Centers are to facilitate the financial intermediation process, through
performing tasks such as the tasks which are done in case of self help groups.

The overall system of micro credit and micro finance was pioneered by
Professor Yunus in 1976, and has grown very rapidly since. We are considering the
micro credit is a major part of micro finance. There is also a large and increasing
number of MFIs in India, most of which use the SHG method. A small number of
these MFIs use the Grameen system, but the portfolio of the approximately
thirty-five larger MFIs which use the SHG system.

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1.4 Why Grameen in Bangladesh and SHGs in India?

The rural poor in India are not so different from their counterparts in
Bangladesh, and the differences between Northern and Southern India, for
instance, are certainly more pronounced than those between poor rural
communities in West Bengal, or UP, Bihar and Orissa, from their neighbors in
Bangladesh. It seems prima facie to be odd, therefore, that two such different
systems have evolved, and that there are, as yet at any rate, so few examples of
the SHG system in Bangladesh or of the Grameen system in India.

The Grameen system is often criticized in India for being over-disciplined or

even militarist, with its tradition of saluting, of meetings with imposed seating
systems and the necessity for strict adherence to pre-set schedules, by staff and
members alike. It may, for that reason, be more acceptable in Bangladesh. But in
India we are more co operative so we accepted the name as self help group
instead of following the name of Grameen system.
Adapted by article, grameen bank groups and self-help groups; what are the
differences? - By malcolm harper.

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 Let us have a snapshot of small statistical data which provides us to know
about the help taken by the people from the micro finance or simple we say from
self help groups. In the financial year 2007-08,
 Microfinance in India through its two major channels SBLP [self help
group bank linking program. Implemented by NABARD] and MFIs, served
over 33 million Indians, up by 9 million over the previous financial year.
 4 out of 5 microfinance clients in India are women.
 Per 31st March 2008, the outstanding micro-credit portfolio of India
Microfinance was about Rs. 22,000 crores.
- 75% are accounted for by SBLP,
- 20% by large MFIs and
- 5% by medium and small MFIs
 Growth of MFI loan portfolios passed 70% annually between March
2006 and March 2008. The strongest impulse came from medium
often urban MFIs in 2006-07 and from large MFIs in 2007-08.
 Indian MFIs are true to their mission of serving the poor strata of
society. A stable 8 out of 10 clients have been provided loans sized
less than Rs. 10,000.

 The loan segment between Rs. 5,000 and Rs 10,000 has been growing
strongest. This can be explained by two impulses: On one hand,
microfinance customers mature to bigger loans over the loan cycles.
On the other hand, urban microfinance starts with comparatively
bigger loans than rural finance.

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 Indian MFIs serve 4.1 million clients from the SC/ST background. The
reported number of SC/ST has been growing alongside the rate of
total outreach, thus the SC/ST share is stable at 3 out of 10 clients.

 India's MFIs operate in 209 out of 331 poorest districts of the country;
up by 5% over the previous year.

 Large MFIs are particularly active in expanding their operations to the

poorest districts; many of them serving poorest than other districts.

 Urban Microfinance is emerging as a strong growth driver; between

March 2006 and March 2008, 1 out of 3 new clients was from the
urban background. One Quarter of all MFI clients is from the urban
background.
Adapted by sa-dhan. Bharat Microfinance Report - Quick-Data 2008.

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CHAPTER - II

Literature review

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2. LITERATURE REVIEW:
The main objective of the literature review is to detail the facts
regarding the study and to see an overview of the literatures which supports
the study. Basically a detailed study and personal interviews of the different
self help groups, NGOs and MFIs is must for this type of study because the true
facts can be gathered through these institutions as well as groups. An
interaction with people makes the study better and comprehensible. Still many
books and other sources help the study to make more realistic.

For the further reference on the study, I studied the literatures of

Sridhar Krishna’s book named self help groups in the context of microfinance.
The book is published by ICFAI university publications. Mr. Sridhar Krishna
holds PhD in economics from the center for economics and planning.
Jawaharlal Nehru University. He is an associate editor of Indian journal for
labour economics. Currently Krishna is the consulting editor for ICFAI center
for research.

In his literature he has quoted that, self help groups has enabled
financial intermediation, and taught their members the discipline of saving,
pooling their savings for lending to the members of the group for income-
generating activities. Given their level of poverty in India, it is very difficult for
poor people to save money, yet these self help groups have managed to
collect small amount of savings from their members. Considering that 70% of
these self help groups are in the southern states, the government is thinking of

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replicating this experience particularly the Andra experience, in the states for
Bihar and Uttar Pradesh.
In Tamilnadu state, the self help groups are adopting even the better
technology like satellite programming by the support of government.
Vocational satellite centers are opened at 11 different places of TN.
In the book, Mr. Krishna has focused his view on SHG majorly. The book
contains different view of different authors by their articles. In an article
written by Mr. Hemanth Kumar Pamarthy, he points out that, the products of
the rural India have great potential for sale not only in the rural areas but also
in urban areas like cities and metros.
Even if entrepreneurs initiate micro enterprises in rural areas with the
aid of micro finance, they find difficulty in marketing their products because
the matter of quality. If groups start taking care of these things and if
government takes care of it means automatically the sales comes high and it
leads to the proper utilization of fund given from the micro finance
institutions.
In the article written by Malcolm Harper and RV Ramakrishna, they
points out that, SHGs are co operatives in all aspect except for their name and
legal status. Co operatives such as district central banks and the primary
agriculture credit societies can be ideal instruments fro dispensing with credit
to different SHGs.
In the article “microfinance: An integrated Approach for microenterprise
development in India”. Written by Naveen Kumar Shetty, says the study
conducted in the place named Belthangadi Taluk of Dakshina Kannada district,

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by considering four type of micro enterprise like, food items, chemical items,
textiles and rexine items.

The income generating activities have resulted in an increase in incomes

of the members of SHGs. And they spent more on food articles, children’s’
education, on health facility, on new house constructions or repairing the
houses, on cloths etc… these all the examples shows the maximum utilitarian
of the support of the concept of micro finance.

In article “Role of self help groups in marketing microfinance products in

India” written by RS Barathish Rao and Uma Sharma, they pointed out that
commercial banks have linked 8,09,238 SHGs so far and regional banks have
links with more than 6,15,021 and also the cooperatives have linked with
1,97,217 SHGs. While the self help group link programme in India has emerged
as one of the largest programme of its kind in the world. It took a great
recognition.
However the micro finance is developed and well recognized, it also has
some of the negative points in it. Negatives may not be completely proven still
some of the writers and thinkers have given those negative points regarding
the work and follow ups of the micro finance, self help groups and its other
activities.

An article written by Devinder Sharma. An Indian journalist, writer, thinker. He

is well-known and respected for his views on food and trade policy. Trained as
an agricultural scientist, Sharma had been the Development Editor of the
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Indian Express, the largest selling English language daily in India at that time.
He quit active journalism to research on food and developmental policy issues.
In his article titled, “Ground reality”-Negative assessment of microfinance
institutions. He said and criticized as,

Micro-finance institutions on a looting spree: making profits from

poverty. Poverty has literally become a big and organized business. If you are
educated, and looking for a profitable business enterprise, and more so if you
are a non-resident Indian and want to translocate to India and still make
millions, micro-finance offers you the right avenue.

There can be no better business opportunity than starting a micro-

finance institution with assured returns and 100 per cent loan recovery. You
can even think of trading on the stock exchange after a couple of years. And
still more importantly, you can hold your head high and claim that you are
helping the poor to come out of the poverty trap.

You don’t have to feel ashamed and morally guilty. The elite in the
society have knowingly (or unknowingly) given you a license to loot. The
unprecedented growth in micro-finance tells us that modern-day Shylocks are
everywhere, looking at every possible opportunity to make profits from
poverty. Rich countries become rich at the cost of the poor countries. Rich
people in any society also (of course there are exceptions) follow the same
path. Micro-finance is a classic example.

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He said micro finance player are the game changers. Even an article published
in the Hindustan times. The article named ‘game changers’ supported his view.
He also said, they have shifted the game from the hands of the villains of the
story, the sahukars or money-lenders, to a sophisticatedly organized class of
neo money-lenders.

These are not the usual banias but a highly educated class of people
who use all sophisticated skills to rob the poor. And they have done it
remarkably well.

He gave supporting points for his view. Most of the micro finance
institutions are charging interest rate up to 24% Pa. but no body know up to
what extent this is fair in the micro finance. They have named themselves as
they are empowering the poor still they are charging the rate of interest above
20%. This comes up to the rate which the money lenders charge.

If the poor can be empowered with a 24 per cent rate of interest, how
come the resourceful people in the cities/towns need a much lower interest
rate to get empowered? If the poor in the villages can make a business
enterprise even after paying a 20-24 per cent rate of interest, why do people
in the cities find it difficult to do so? Or is it that we need a different yardstick
(and in this case it happens to be the interest rate on your borrowing) to
empower the poor and the not-so-poor? In other words, since the poor have
no voice, some of us (and that includes banks) have joined hands to exploit the
poor in the name of development.

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 India Microfinance Report 2009 tells us that the portfolio of the micro-
finance institutions has grown by 97 per cent, and number of beneficiaries has
also gone up by 60 per cent. More than 150 million are already borrowing
from Micro-finance institutions. What the report however does not tell us but
is quite apparent is that this organized group of money-lenders is now
beginning to take over the unorganized villains of the game the traditional
money lenders.

He also said in his article and given proof as, Another news report tells
us that SKS Micro-finance is charging approximately 24 per cent rate of
interest in Orissa, Karnataka and Andhra Pradesh; in southern India, Equitas
Micro-finance is seeking 21-28 per cent interest rate and Basix Microfinance is
providing small loans at 18-24 per cent interest rate. There are numerous
other players, and they all rake in money. Sewa in Gujarat and the Grameen
Bank in Bangladesh too thrive on a similarly high rate of interest.

Than we can easily say that they are game changers and taking the
business from the hands of money lenders and they are becoming the neo
money lenders. Even while studying on this I have come to know that
exorbitant interest rate is not completely fake information. Because I have
taken interview of one of the group comes under the Stri shakthi
sanga[women empowering scheme] where I came to know that, they takes
the assistance from the local branches of a national bank but the bank charges
24% interest rate on the loan which is issued to the groups as assistance.

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 The groups need to pay the installment on monthly basis and they have
to pay the amount including the interest charges and group savings amount.
Though the group will get the sufficient amount as subsidies amounted up to
one lakh. Still the bank will get back the full amount of money including the
interest.

Before discussing the interest rate which would be charged by micro

finance institutions or any other group, we should clear several questions
which arise. First we should get the proper answer for those questions. Like,

1. At what interest rate MFI get debt from Banks, NABARD, SIDBI and other
financial institutions?

2. Why a poor women is taking loan at 24% from MFI's (Microfinance has
reached 150 million people) when cheaper loans are available from other
sources? Are MFI's forcing them to take loans?

3. What is the repayment rate of agriculture loans vis-a-vis compared to

MFI’s?

4. What interest rate people pay on loans in rural as well as urban?

5. Does agriculture loan required any collateral and whether is it available to

landless poor or who does not have a property to get loan?

6. What collateral MFI's take against the loans they provide?

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 We should have clear information regarding all this aspects than only we
can comment on the services which are being provided from the micro finance
institutions. Than only we can compare the interest rates properly and able to
say that banks are charging high rate of interest for the micro finance
institution.

We can’t say easily that micro finance have all these negatives in it and
we do not know up to what extent the data is true and fair. Even giving proof
for the information is also a difficult task moreover, this is a controversial topic
and it’s beyond our research limitation to prove it.

3. OBJECTIVES OF THE STUDY:

1. To study on what exactly is micro finance and micro credit institutions.

2. To know about different type of MFIs and self help groups.

3. How these MFI works and helps to the society and what is the importance
of MFIs.

4. Capital and flow of fund to these MFIs and out flow of money.

5. To know the negative aspects of MFIs and different opinions.

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4. RESEARCH DESIGN AND METHODOLOGY:

Problem definition:

A research problem, in general, refers to some difficulty which a researcher

experiences in the context of either a theoretical or practical situation and
wants to obtain a solution for the same.

A problem clearly stated is a problem half solved. Thus, defining a

research problem properly is a prerequisite for any study and is a step of
highest importance.

It is only on careful detailing the research problem that we can work out
the research design and can smoothly carry on all the consequential steps
involved while doing the research.

In the light of the above background, we can illustrate the main problem
definition for the study as, study regarding the positive aspects as well as
negative aspects of the micro finance to the society and to the poor.

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5 METHODOLOGY OF RESEARCH:

Effective research need to take up the following steps so these are the
steps taken largely for the study.

1) Defining the problem and research objectives.

2) Developing the research plan.

3) Collecting the information.

4) Analyzing the information.

5) Presenting the findings.

6. DATA COLLECTION:
The required data for the study collected from the primary source of
data as well as secondary source of the data. Time required to obtain the
primary data is higher compared to that required for collecting secondary
data.

Primary data collection is directly from respondents, means from

different self help groups and few micro finance institutions which are
providing assistance to those groups. Other respondents are the members of
the self help groups and common people who suggested continuing the study
in a manner.

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 Primary data collection is through personal meeting of the members of
the different groups and interviews.

Secondary data is collected through different books, magazines, E books

and from various web sites. The details regarding the secondary data source is
will be given in the bibliography at the end of the report.

7. SCOPE OF THE STUDY:

The scope of the study is mainly to bring out the total and true facts
regarding the micro finance institutions and self help groups. About their work,
process, what all the facilities provided and also the limitations of it. The
research was focused on various reasons for the investments and the ways of
investments the investor goes to make hence the findings are fair reflection of
respondents.

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 CHAPTER - III

Theoretical framework
8.1. Difference between conventional banking and microfinance banking.
8.2. Between micro credit and microfinance25

8.3. Impact of microfinance on poverty.

8.4. Microfinance clients

8.5. Micro finance for the economically active poor

8.6. Main micro financing programs.

8.7. Significance of microfinance institutions.

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8. THEORETICAL FRAMEWORK:

Financial developments were concerned about the formal institutions

in the “formal market’’. The traditional banking services were not accessible
to the poor because of the risk, high costs and low repayments. But what
about the poor who live below the line? The poor had no other option except
to borrow from informal money lenders, relatives and “pawnbrokers” who
often charged high interest rates making them poorer.

To fill in the gap left by formal financial institutions a relatively new

concept ‘’Micro financing’’ came up with sole objective to make credit
available to extreme poor giving them the opportunity to contribute in the
economic growth. After the World War II, Governments also tried to help the
poor farmers through credit programs run by their agriculture banks. But
these programs could not sustain due to heavy subsidized interest rates and
due to political factors the credit access remained the influential only.

The history of the small scale and micro-lending may go to nineteenth

century when small scale “credit cooperatives” were established in Germany.
But the Grameen Bank of Bangladesh is considered to be the beginning of the
modern Micro financing.

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1. DIFFERENCE BETWEEN CONVENTIONAL BANKING AND MICROFINANCE
BANKING:

The main difference between a conventional banking institute and

microfinance institute is of their approach towards their customers. The main
difference is of their target market. A microfinance institute is opened with the
main aim of targeting the poor and providing its services to that part of the
community which is vulnerable to poverty.

Now days it also include small and medium enterprises. Where as, a
conventional banking institute has a bigger target market. It covers all the
clusters of the community. Its main aim is profitability and other things are set
aside. Increasingly, formal financial institutions are recognizing the benefits of
serving poorer clients but these institutions are only going there because they
are recognizing that they can also get profits from the poor. Another
difference between the commercial and microfinance banking is of group
lending with only social collateral. Commercial banks have developed products
that are targeting the poor but they also demand physical collateral whereas
the microfinance institutions rely on social collateral.

Micro credit is based on a separate set of principles, which are

distinguished from general financing or credit, Micro credit emphasizes
building capacity of a micro entrepreneur, employment generation, trust
building, and help to the micro entrepreneur on initiation and during difficult
times. Micro credit is a tool for socioeconomic development.

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8.1. A. COMPARATIVE ANALYSIS OF MICRO-FINANCE SERVICES OFFERED TO THE
POOR:

Source: R. Arunachalam - Alternative Technologies in the Indian Micro-

finance Industry
Page | 32
8.2. BETWEEN MICRO CREDIT AND MICROFINANCE:

Microfinance is the provision of a wider range of financial services to

the very poor and Micro credit is one of the services offered by microfinance
Institutes. As mentioned in the definition of Microfinance. Micro credit is
very small loan given to the poor which are considered unbankable. These
people are usually unemployed or poor entrepreneurs. They lack collateral,
steady employment and a verifiable credit history and therefore cannot meet
even the most minimal qualifications to gain access to traditional credit.
Micro credit is a part of microfinance, which is the provision of a wider range
of financial services to the very poor.

8.3. IMPACT OF MICROFINANCE ON POVERTY:

Microfinance has helped poor in increasing their income levels and

improvements in other social indicators. The primary Reports of micro
finance says that, there was increase in their business and house income of
borrowers who were able to repay the first loan. Microfinance has changed
lives of thousands of poor just as this woman which is yet to be captured by
studies. There are so many examples in this regards. According to Goldberg,
apart from these income increases there were social gains of the
microfinance programs like the increase in education of children, nutrition of
babies and empowerment of women (Goldberg, 2005).

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 In the early1970’s, Microfinance started as a revolution in countries of
Latin America and South Asia with independent initiatives. Now there are
more than one thousand micro finance institutions over 100 countries, 73%
are NGO’s, 13.6% are credit unions 7.8% are banks and rest are saving
unions. And about 65 million people are served by the micro finance
institutions these days. (Morduch, 2005)

8.4. MICROFINANCE CLIENTS:

Microfinance clients are poor and vulnerable non-poor who have a

relatively stable source of income (microfinance gateway, 2008). The clients
of microfinance can be divided in to 2 main categories, ‘’Rural’’ and ‘’Urban’’
clients. But the common character between them is that they are low income
persons who do not have access to the formal financial institutions and they
are typically self-employed. Usually, they have household-based enterprises
(microfinance gateway, 2008). The most common business in which rural
clients are typically involved is, food processing including diary, fruits,
vegetable and others. This category also constitutes small farmers and petty
trade. Whereas, in urban clients are shopkeepers, service providers, artisans,
street vendors, etc.

Poor can not access to the conventional financial institutions for many
reasons including income. The poorer you are it is less likely that you will
have access to these services whereas the informal financial institutions are
too expensive for the poor.

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 For this specific under-served segment microfinance services are offered and
they are the real clients of microfinance services.

At the house hold level most impact assessment studies have found that
borrowers of the micro finance institutions experience positive impacts on
income, asset accumulation and consumption.

According to a report printed in ‘’The Times’’ magazine the clients have

experienced positive increase in their income and the increase was more
significant for women than for men. Clients experienced improved
relationships with suppliers of inputs for their business, increased household
consumptions, improved quality of their children education, increased
income and improved employment generations.

8.5. MICRO FINANCE FOR THE ECONOMICALLY ACTIVE POOR:

Poor people need shelter, clothes and food. The services of the micro
finance institutions are aimed at the economically active poor. The people
who are already involved in some ventures and they need some leverage and
that are the micro finance which seems to be a catalyst to boost their
activities. The economically active poor have some financial literacy. They
know how to diversify their portfolios, how to save and where to invest. To
such people micro finance is useful which increases their income and
improves their lives.

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 According to the studies which are done already on micro finance, they say,
impoverished people do not have any assets even they do not have irregular
incomes. For this group direct aid like food, clothing and shelter are much
appropriates not the micro financial services. They further divides the poor
people in categories.

First impoverished people who do not even feed their families.

Second poor who have irregular incomes and they are financially active. They
are engaged in some ventures. These groups need micro credit to stimulate
or accelerate their financial activities. Third group he defined is Upper poor,
they have small but regular cash flows they even can save but due to their
living conditions they are considered below poverty line. Fourth group is near
poor they consistently meet minimum standards of living like food and health
services but they do not have excess funds to face unseen problems like
prolong illness, pregnancy or death of a partner.

8.6. MAIN MICRO FINANCING PROGRAMS:

No doubt, micro finance has provided lot many facilities to the poor
and poorer sector of the society by providing many amenities. In most of the
developing countries, existence of micro finance is there in a good structure.
People are utilising the facilities provided by the micro finance institutions.

Major services provided by micro finance are like, helping people to

create their own self help groups, providing financial assistance to the groups
as well as individuals, providing different type of micro credit facilities,
providing micro insurance, facilitates and encourages people to save money
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 for the future needs, etc... Other than this, micro finance institutions try to
build up the level o confidence to improve the economic stability of the
family and also the ability of the groups which they belongs. They provide
stages and opportunity to grow up themselves. By the help of all this they
can get in to the production and make profit out of it.

8.7. SIGNIFICANCE OF MICROFINANCE INSTITUTIONS:

The microfinance institutions have a pivotal role to play in a society

marked by economic classes. By providing small loans to poor people, these
institutions attempt to provide remedies to the woes of the deprived class.
Apart from this, it is through these institutions that poor people are able to
avail small loan facilities on reasonable terms and interest rates. In the
absence of these institutions the poor people are more likely to fall prey to
the exploitation of money lenders, who are more likely to exploit the poor
masses by providing loans on enormously high rates. As a result the
problems of the poor class are likely to be multiplied instead of being
nullified.

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 CHAPTER - IV

Leading views on micro finance

9.2. Poverty lending approach.
9.3. Financial systems approach.

9.4. Sustainability of the micro finance programs.

9.5. Supply lending & poverty lending approach.

9.6. Demand driven and financial system approach.

9.7. Target market.

9.8 objectives of the micro finance institutions.

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9.1. LEADING VIEWS ON MICROFINANCE:

There are two leading approaches to microfinance:

 Poverty lending approach.

 Financial systems approach.
Both these approaches tend to provide the availability of financial services
for the poor, despite having consonance in their goals, each approach tends
to adopt a different modus operandi for the achievement of their desired
aim. We look at how these two approaches tend to operate.

9.2. POVERTY LENDING APPROACH:

The basis focus of the poverty lending approach is the reduction of poverty
through institutions which receive funds from donors or governmental
authorities. The basic aim of the poverty lending approach is to reach the
poorest of the poor. In poverty lending approach to microfinance saving is
only limited to a trivial status i.e. only as a compulsion for receiving credit.

Institutions adopting the poverty lending approach are not

sustainable, the reason being that the interest rate on their loans is too low
for the recovery of even their costs. These institutions also do not cater to
the demand for micro saving services among the poor. The focus of poverty
lending approach is upon micro-credit not microfinance.

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9.3. FINANCIAL SYSTEMS APPROACH:

The financial systems approach focuses on financial intermediation

between the poor borrowers and savers on commercial basis. This approach
lays its emphasis on the institutional self-sufficiency. The world has
witnessed the emergence of many commercial microfinance intermediaries
in the past decades.

These commercial microfinance intermediaries provide credit and

saving services to the economically active poor. The loans of these
institutions are financed by savings, commercial debts and through profitable
investments. The financial systems approach represents a more globally
acceptable model of microfinance.

9.4. SUSTAINABILITY OF THE MICRO FINANCE PROGRAMS:

The sustainability of Microfinance programmes with or without

subsidies still remains a question among the economists and researchers.
Most of the microfinance programmes are not sustainable and heavily
depend upon external findings. A study says that only one percent of these
are sustainable and rest will either close or keep relying on subsidies.

Now the question is that should a microfinance programme be given

subsidies in the form of low interest rates by the government and external
funding by the donors and what if the donors decided to stop their funding.
If subsidies are worthy for poverty alleviation then other investments then it
is better to continue with them.
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 Reaching poor is an expensive job. The formal Institutions left the poor
because poor didn’t approach themselves and the financial institution were
not ready to outreach poor because of high cost. The microfinance tried to
outreach the poor which has its financial costs. In these circumstances,
external funding is justifiable. But still the microfinance programs which are
sustainable for able to attract more borrowers and in turn able to offer more
loan products. (Zeller and Meyer, 2002)

Increased access to credit for the poor on a long term and sustainable
basis can bring significant benefits, MFIs must continue to work to improve
efficiency levels, and to increase scale. The role of economies of scale works
same for micro financial services as for other products. By reaching higher
scale, MFIs will bring down the cost of providing loans, and the benefits will
be transferred to the poor in terms improved loan products, better access to
loans, and lower borrowing costs. Operational efficiency is very important
here.

According to Ledgerwood, 1998, the key factors that contribute to the

success and sustainability of the many micro financial institutions are,

 Favourable macro economic conditions,

 Managed growth,
 Deposit mobilization,
 Cost control
During the 1980’s Microfinance mainly comprised of an integrated package
of credit and training and hence the institutions were relying on donor

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 agencies and subsidies but with the concept of making these institutions
sustainable, these institutions are recognising the need for saving services to
their clients and to access market funding sources (Ledger wood, 1998). This
recognition is a very positive step to make these institutions stand on their
on feet without any assistance from donors or government sector.

According to (Maria Otero, 2005, page 4) in her paper on `Creating financial

system to serve poor majority` she stated ``If microfinance institutions want
to make a real impact, they have to be permanent`` i.e. that viability of these
institutions is important. They should be sustainable because when they will
be there people will be benefited from them. As these are reliable and
authentic source of funding to them. She also described the common traits of
the leading micro finance banks of the world.

9.5. SUPPLY LENDING & POVERTY LENDING APPROACH:

poverty lending approach focuses on reducing poverty through
credit and other services provided by institution that are funded by donor
and governmental subsidies and other concessional funds. The basic aim of
the poverty lending approach is to reach the poor people through the service
of credit. One of the leading analyst, Marguerite Robinson state that saving
is not given any significance in the poverty lending approach.

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 In the poverty lending approach the role of saving is of a trivial nature i.e.
mandatory saving is only considered as a pre-condition for the purpose of
receiving a loan, other than this role there is no other role for the saving to
play in the poverty lending approach.

This approach claims that over all goal of the micro finance should be
poverty reduction and empowerment. Financial stability of the institutions is
worthless unless these institutions have any impact on the lives of the poor.
Further states that in poverty lending approach subsidies and the donor
funding is important.

These funding are of vital importance in reaching the poor out reach
as there will be a lot of delinquencies. The supply lending approach perceives
credit as an important and effective tool for the poverty reduction. The
target market is poorest of the poor.
According to the development economists to enhance economy
growth in the rural areas, the farmers needed credit to attain the production
inputs. The supply lending approach is based upon the assumption that
farmers are faced with shortage of capital and/or are devoid of access to
financial resources. As a result these farmers look forward towards informal
money lenders for funds. The reason for relying upon these sources is to
organize funds for fulfilment of their needs especially during the cultivation
season. Consequently they are exploited by the informal lenders who charge
unreasonably high interest rates.

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 In this scenario there is a need of a system that can provide farmers
with funds at subsidized interest rates .There should be a system that is
available to supply loans and inputs required for cultivation of improved
varieties of crops at subsidized interest rates. Institutions using the poverty
lending approach are not sustainable in the long run because they charge
subsidized rates on credit advanced, the interest rates charged by these
institutions are not adequate enough to cover the operating expenses.

9.6. DEMAND DRIVEN AND FINANCIAL SYSTEM APPROACH:

The financial system approach focuses on the commercial financial
intermediation among poor borrowers and savers. It emphasizes on the
institutional self sufficiency. Donor funds can not finance micro credit
programs on global scale. The sustainable micro finance intermediaries have
been working for many years successfully. They provide micro credit and
saving services to the economically active poor. They finance their loans by
savings and different commercial investments.
Commercial micro finance is not for the starving borrowers, it’s not for
the people who are illiterate, who do not have skills. Starving borrowers
spend their loans for buying food and other things for their survival. On the
other hand economically active poor spend their loans on their ventures and
they have the capacity to repay the loans.
The financial system approach focuses on demand of commercial
financial services of the poor borrowers and savers. The transformations of
NGOs into commercial MFI are the foremost examples of the financial
system model that is currently active in Nepal.
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 The aim of the institutions operating under the financial systems
approach provide the dual benefits i.e. these institutions not only provide
easy access to credit at reasonable interest rates to economically active poor
and micro-entrepreneurs but also facilitate the provision of convenient and
safe saving services to those who want to store cash and gain positive
interest rate upon their investment.

Since traditional micro credit institutions relied upon donors for the
availability of funds. The aim of this model is to enable MFIs to reach self-
sufficiency and expand outreach of services to low-income clients profitably.

9.7. TARGET MARKET:

For selecting a target market the MFIs need to select their objectives
and devise ways to reach the target groups which results in the sustainability
of the MFIs. The market must be chosen keeping in view the potential
demands. Organizations that do not focuses on their targets and objectives,
as a result they are unable to design the appropriate products for the specific
targeted market. Eventually, they fails in their operations resultantly they are
at loss. The objectives of the MFIs should be clear. What they are producing
and for whom they are producing. MFIs should produce the products keeping
in view the poverty level of the people.
It can be defined by keeping in view the characteristics of the target
groups i.e. poverty level, ethnicity, caste, religion, etc. then the MFIs make
the clear sketch to whom they want to serve and they want to serve in the
competitive environment, why people buy their services? What make their
financial products more attractive?
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9.8 OBJECTIVES OF THE MICRO FINANCE INSTITUTIONS:

Market selection depends upon the objectives of the micro finance

institution and demand of the micro financial products. There are un served
and underserved clients in all the countries. The supply side or the poverty
lending approach does not cater these un served or underserved people on
the continuous basis. Institutions who are working on the financial system
approach need to supply these people with suitable services depending upon
their needs.
The goal of the MFIs which serves as the development organizations is
to fulfil the needs of un served and underserved people describes these
objectives as,
 To reduce poverty
 To empower women or other disadvantaged population groups
 To create employment
 To help existing businesses grow or diversify their activities
 To encourage the development of new businesses
Two main objectives of the MFIs serving in any country are
OUTREACH
It is to serve those people who have been deprived previously or
are underserved. (Women, poor and indigenous and rural poor).
SUSTAINABILITY
It is to generate enough revenues to cover the expenses for
providing the financial services. The main theme of the financial system
approach is the sustainability.
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 CHAPTER - V

Impacts
10.1. Moral hazards
10.2. Mandatory savings
10.3. Cash flows
10.4. Social collateral

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10. IMPACTS:
When the MFIs have not done the market analysis and have no clear
objectives. They can not be sustainable as explained earlier. Most of the
Pakistani MFIs are working on the doctrine of poverty lending approach.
They just give the credits without viewing the needs of the people, so most
of their portfolios are at risk.

10.1. MORAL HAZARDS:

The main problem in the micro credit is the compliance of the credit.
It is not invested in the portfolio for which it was sanctioned. The loans
normally granted for the purpose are not invested accordingly. If the loan
was delivered for agriculture or livestock it was used to repay the loan of
another bank or the person.

10.2. MANDATORY SAVINGS:

In order to sanction a micro loan, the group which is going to take
the loan has to open a saving account at the bank which is mandatory.
Normally the saving amount is 10% of the loan. These savings are of no
benefit to the customers; rather they are of benefit to the bank. When the
group or a member of the group becomes defaulter their savings are used as
a tool to repay the loan. Hence savings acts as hidden collateral.

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10.3. CASH FLOWS:
In order to deliver the micro loans cash flows are conducted by
the bank officers. These cash flows interpret the client’s cash flows
(revenues and expenses).The reason is the repeated borrowers or people
who are aware of the program they provide incorrect information. As this
information can not be verified so they do not present a true picture of the
client’s revenues. People who have already taken the loans from other
sources come under the burden of heavy loans and are unable to repay
them.

10.4. SOCIAL COLLATERAL:

Unlike conventional banks micro finance banks have social collateral
(personal guaranties).At the time when loans are sanctioned the members
give cross guarantees that they know each other and are responsible for
each others loan payments. When the group becomes defaulter, their
savings are adjusted in the loan, in this way the savings of the serious
prospects are lost. This practice seriously hits the program and also kills the
doctrine of social collateral.

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 CHAPTER - VI

Discussions and implications

11.1. Negatives and critics about MFIs.

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 11. DISCUSSIONS AND IMPLICATIONS:

In this section, we review some of the important questions on

microfinance. Our assessment is based on numerous studies, technical
surveys, and newspaper reports on microfinance.

I. Is Microfinance a Desirable Alternative to Informal, Exploitative Sources of

Finance?

The spread of microfinance and the success of MFIs in various countries

around the world prompt a question, who served the poor before the
microcredit revolution? It is well known that conventional banks, which act
as creditors’ to most entrepreneurial activity in the modern world, have
largely avoided lending to the poor. Instead, credit to the poor has been
provided mostly by local Moneylenders, often at usurious rates. Therefore, it
is not surprising that microfinance has been welcomed by most as an
alternative to the abusive practices of village moneylenders. In contrast, MFIs
can often offer lower interest rates than local moneylenders because of their
higher efficiency in screening and monitoring borrowers, which results from
both their economy of scale (serving more borrowers) and their use of joint
liability lending mechanisms. This lowers the MFI’s cost of lending relative to
that of the local moneylender.
II. How high are the Repayment Rates for MFIs?
This is widely regarded as the greatest achievement of microfinance.
Many MFIs report high rates of repayment, often greater than 90 percent.
These claims have driven considerable academic Interest in why and how
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 microfinance works. Furthermore, these repayment rates are widely cited in
popular media and have been one of the reasons for the recent interest
generated by microfinance in financial markets worldwide. Morduch studies
the repayment rates for the Grameen Bank for the 10-year period of 1985
to1996.
During this period, Grameen’s average loan portfolio grew from $10
million to $271 million and membership expanded more than 12-fold to
include 2.06 million members in 1996. For this decade, Grameen reports an
average overdue rate of only 1.6 percent. [Statistics adapted from the micro
finance revolution by Sengupta and Aubuchon].

III. Is there more importance to microfinance than group lending or joint

liability contracts?
The success of microfinance in generating high repayment rates led many
economists to investigate the reasons behind this success. Joint liability
contracts were seen as the break from traditional lending mechanisms and
economic theory was used to readily explain how these contracts helped to
improve repayment rates. The growth of the literature on group lending
contracts in the mid-1990s offers the impression that all MFIs operate as
such, but the reality is that MFIs use a variety of lending techniques, such as
dynamic and progressive loans, frequent repayment schedules, and
nontraditional collateral to ensure high repayment rates among poor,
underserved borrowers. Another mechanism used by MFIs is that of frequent
repayments, which often begin even the week after the loan is disbursed.

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 By requiring small repayments before the business venture has reach
maturity, MFIs are essentially requiring that borrowers have a second source
of income and, hence, borrow against their current consumption. This allows
MFIs to screen against high-risk borrowers from the beginning because
borrowers will be able to repay the loan even if their venture fails. Indeed,
weekly repayments give the borrowers and lenders the added benefit of
discovering problems early. The final mechanism is the requirement of
nontraditional collateral, which was introduced by banks such as Bank Rakyat
Indonesia (BRI).This feature breaks from the commercial practice that
collateral submitted must have a resale value equal to the loan.

In a group lending contract, joint liability often serves as collateral, but

BRI Operates on the “notional value” of an item and allows collateral to be
any item that is important to the household, regardless of market value. This
may include the family’s sole domestic animal, such as a cow, or it may be
land that is not secured by title. Neither item could be sold for much of a
profit without significant transaction costs to the bank, but both items would
be even more difficult and costly for the family to do without.

IV. Is Microfinance an Important Tool for lessening Poverty?

Microfinance started as a method to fight poverty, and although
microfinance still fulfills this goal, several institutions have sought to make a
distinction between the “marginally poor” and the “very poor.”

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 The broadest definition distinguishing these two groups comes from
the Consultative Group to Assist the Poorest (CGAP), which defines the poor
as individuals living below the poverty line and the poorest as the bottom
half of the poor. The overall statistics of micro finance and the data of SA-
dhan micro finance report say that micro finance is one of the best ways to
eradicate the poverty and improve the economic status of the poor.

V. Is Microfinance Sustainable and Profitable?

With all of the positive publicity surrounding microfinance, it may be
surprising to learn that not all MFIs are sustainable or able to return a profit.
Despite their rapid growth and sound operations based on strong theoretical
platforms (such a using group loans, dynamic incentives, and frequent
repayments), less than half of all MFIs return a profit and most still require
the help of donors and subsidies. A lack of financial sustainability doesn’t
necessarily indicate a failing MFI, but rather raises questions about the
mission and direction of that particular MFI.

Even with subsidies, many MFIs remain the most cost effective method to
alleviate poverty; and, as we argued previously, subsidies can help change
the profile of the targeted client from the poor to the extremely poor. For an
MFI to be sustainable can mean one of two things: The organization can be
operationally sustainable or it can be financially sustainable.

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 An MFI that is operationally sustainable raises enough revenue to cover
the cost of operating the business—paying loan supervisors, opening branch
offices, etc. Subsidies might still be used to issue loans or cover defaulted
loans. An institution that is financially sustainable does not require any
subsidized inputs or outside funds to operate. Instead, it raises money
through its lending operations. The Micro Banking Bulletin of 2003 surveyed
124 MFIs with a stated commitment to becoming financially sustainable. In
their survey, the Bulletin found that only 66 operations were sustainable, a
rate just slightly above 50 percent.

VI. Could Competition Among MFIs Lead to Better Results?

Economic theories states that, competition should improve the
performance of MFIs and lead to better service and lower interest rates.
With such a large poor population and high rates of growth, there is also a
large market to support more MFIs. Historically, though, competition has
failed to increase services and often decreases the rate of repayment.
When clients have access to alternative sources of credit, MFIs lose the
leverage they gain from dynamic incentives and progressive loans (i.e., future
loans are contingent on repayment).

VII. Does Microfinance Have Any Social Impact in Terms of women

Empowerment and Education?
Any review of microfinance is incomplete without a discussion of its
impact on women. The micro finance Report lists over a thousand programs
in which 75 percent of the clients were women.
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 SIDBI Foundation for Micro-credit (SFMC), amounts to almost around
85 crores of rupees or thirteen million dollars These MFIs were said in early
2001 to be serving about 200,000 eventual clients, of whom 94% are women.

This focus on women follows that lending to women has a stronger

impact on the welfare of the household than lending to men. This has been
confirmed by a large volume of research on microfinance. In countries where
microfinance is predominant, country-level data reveal signs of a social
transformation in terms of lower fertility rates and higher literacy rates for
women.

A pro-female bias in lending works well for the MFIs. Practitioners

believe that women tend to be more risk averse in their choice of investment
projects, more fearful of social sanctions, and less mobile (and therefore
easier to monitor) than men—making it easier for MFIs to ensure a higher
rate of repayment. However, critics have argued that microfinance has done
little to change the status of women within the household. There are few
points to evidence that it is mostly the men of the household and not the
women borrowers who actually exercise control over the borrowings.
Moreover, microfinance does little to transform the status of women in
terms of occupational choice, mobility, and social status within the family.
Therefore, microfinance hardly “empowers” women in any meaningful
sense. Critics’ states whatever but we can see around us how a women is
getting support from the micro finance and how she is empowered.

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VIII. Can the Microfinance Experiment Be Successfully Replicated Anywhere?

Although the microfinance revolution has recorded success in most

developing countries of the world, it has achieved little success in some of
the more developed nations. Because in all the developed countries, per
capita income is comparatively very high and also they usually expect large
credit rather than small amount. Here micro finance helps to eradicate the
poverty but in the developed countries there will not be a problem of
poverty. So micro finance does not suit for the developed countries but it
suits very well for the countries like India to eradicate the poverty and to
empower the poor to increase their economic status.

Overall above study states all the positive points regarding micro
finance. And also answered many questions regarding micro finance. Study
has given the facts and figures regarding the micro finance development and
also statistics of economical developments. We have seen the figures in the
beginning part of this report about how many people have involved in micro
finance and development of themselves effectively.

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CHAPTER - VII

Negative impacts
11.1. Negatives and critics about MFIs.

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12. Negatives and critics about MFIs:

Now we shall have a look over the negatives of the micro finance and
what all the critics are there on the topic of micro finance. These negatives
are just a look over the critics and no assumptions and criticism has done
from these negatives. Moreover we will see only the critics made from the
articles, writers and professors.
First we shall have a look over Devinder Sharma’s negative assessment
of microfinance institutions. Devinder Sharma is an Indian journalist, writer,
and thinker. He is well-known and respected for his views on food and trade
policy. Trained as an agricultural scientist, Sharma had been the
Development Editor of the Indian Express, the largest selling English language
daily in India at that time. He quit active journalism to research on food and
developmental policy issues.

He has penned down his critics in his article ‘ground reality’ Devinder’s
assessment is the latest in a long list of negative articles that have appeared
on the microfinance sector in India.

He stated that, Micro-finance institutions on a looting spree: making

profits from poverty he substantiated his thoughts by giving some of the
facts like, there can be no better business opportunity than starting a micro-
finance institution with assured returns and 100 per cent loan recovery.
Further he state that, At 24 per cent rate of interest if the micro-finance can
empower the poorest of the poor I wonder why do we have to keep the rate
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of interest for the urbanites, whether it is for housing, for car, or for any
other business activity, as low as 6 to 8 per cent. Many things he has
discussed in the article but we feel that he has not given much data regarding
his thoughts.

He stated that, micro finance institutions are charging 20-24% interest

rate for the amount which they have provided to the people. He is partially
right in his thought but not completely. Because banks which are acting as
micro credit providers, they are charging the rate of interest which he has
stated but NGOs like Shri Dharmastala SIRI Gramodyoga samasthe, they are
charging the rate of 9% interest rate on the loans which they have provided.
Moreover, banks justify themselves as they are charging the rate of interest
because they are not taking anything as collateral or security for issuing loans
to the groups and individuals.

Further, Hindustan times have published an article regarding micro

finance under the heading of ‘game changer’. In that also they have stated
the thoughts regarding the interest rate. They sat most of the micro finance
institutions charges nearly 30% interest rate on loans. Writer says like, when
the borrower asked to pay such a high rate of interest, how they would
concentrate on further growth in them? They will be in the worry of
repayment of loan so there will not be any empowerment and growth.

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 Further there are complaints from micro finance state of the sector
report like, although there are some well known exceptions, including MFIs
who rely on methods such as an easy-to use housing index to target the
poor, most MFIs, while contributing to the financial inclusion objective, are
making no special efforts to target the poor.

Other critics like, it is well accepted that microfinance is best suited to

reaching the economically active poor. It is ill-suited to solving the problem
of chronic income deficits. However it is also the case that there are many
potential borrowers whose income deficits could be removed by credit if
they were combined with other inputs.

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CHAPTER - VIII

Micro finance: challenges ahead

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13. MICRO FINANCE: CHALLENGES AHEAD.

Micro finance system is developing rapidly in India. Even many countries

have adopted micro finance system to grow economically and to make the
poor people economically strong. Still there are many challenges are there in
micro finance road way. They can be called as suggestions also for the
development. They are;

1. Appropriate legal structures for the structured growth of MF operations.

2. Ability to access loan funds at reasonably low rates of interest.

3. Ability to attract and retain professional and committed human

resources.

4. Design of MIS including user friendly software for tracking accounts and

operations.

5. Ability to innovate, adapt and grow.

6. Bring out small and micro enterprises for the MF clients.

7. Identify and prepare a panel of locally available trainers.

8. Ability to train trainers.

9. Capacity to provide backward linkages or create support structures for

marketing.

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CHAPTER - IX

Conclusion

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14. CONCLUSION:

With the recognition of the Nobel Peace Prize in 2006, Muhammad

Yunus’s vision of extending credit to the poor has reached a global level.
Microfinance is not a panacea for poverty alleviation; but, with committed
practitioners, a wealth of theoretical work and a surging demand for both
international and individual investment, microfinance is a poverty-alleviation
tool that has proven to be both effective and adaptable.

In this study, we have tried to give a picture and evaluate the

importance of Micro financial Services for making an MFI sustainable while
fulfilling the Poor’s needs. In the chapters above we have discussed the
poverty lending approach and financial systems approach and their benefits.
The success of MFIs in other countries gives some important lessons for MFIs.

It shows that poor people have diverse credit needs. MFIs have to
provide different and flexible products to help poor get out of poverty. A good
institutional set-up and carefully designed product that is flexible enhances the
capabilities of MFI. It is recommended that the product design and
development by the MFIs be done after understanding the existing financial
service behaviour and the attributes of the poor.

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 During the last twenty years, there have been significant changes in
both the understanding of the needs of the poor for financial services and of
the provision of financial services for them.

The poor has developed its needs for different financial services as he
needs to maintain and improve his life style. The microfinance revolution
during the 70’s showed that the poor are bankable and now there is a time to
show that these poor people are not just the people who need only credit to
fulfil their living needs but they have a need for a set of financial services
which can be offered by the MFIs that meet the complex livelihood needs of
the poor.

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CHAPTER - X

References and bibliography

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15.REFERENCES:
1. Grameen bank groups and self-help groups; what are the differences? -
By Malcolm harper.

2. Sa-dhan. Bharat Microfinance Report - Quick-Data 2008.

3. Self help groups in the context of microfinance. Sridhar Krishna.

4. “Microfinance: An integrated Approach for micro enterprise

development in India”. By Naveen Kumar Shetty.

5. “Role of self help groups in marketing microfinance products in India”

written by RS Barathish Rao and Uma Sharma,

6. “Ground reality”-Negative assessment of microfinance institutions. By

Devinder Sharma.

7. Goldberg, Nathanael. (2005). ‘measuring the impact of microfinance:

taking stock of what we know.’ Grameen Foundation USA Publications
Series,

8. Murdoch, Jonathan. (1999). ‘The Microfinance promise’, Journal of

Economic literature,

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9. Zeller, Manfred and Richard L. Meyer. (2002). ‘The Triangle of
microfinance: financial sustainability, outreach, and impact.’ Food Policy
Statement.

10. Maria Otero, ‘’The Future of Microfinance: Creating Financial Systems

to Serve the Poor Majority’’.

11. Bharat Microfinance Report - Quick-Data 2008

.
12. Micro Credit to Micro Finance Institutions. The need for Transition.
Muhammad Amin. Yasir Iqbal Paracha.

13. The Microfinance Revolution: An Overview. Rajdeep Sengupta and Craig

P. Aubuchon.

14. Self-Help Groups as Financial Institutions. R. Srinivasan.

15. Micro finance in India. A state of the sector report. By Prabhu ghate.

16.Does Micro-finance really benefit the Poor? Shahid khandker.

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