economics final word document

8/3/2019 Economics Final Word Document

1/26

Project On,

Micro Finance

Submitted by-

Devendrakant Sahu- 31

Dhaval Desai- 33

Dhriti Sach Dev- 35

Dipali Parikh- 37

Falak Kothari- 39

( eMBA div- A )

Under the guidance of:

Prof. P.A. Jhonson

MET Asian Managenment DevlopmeentCentre

Institute Of Mangement


2/26

Microfinance: Philanthropy Through

Industry

What is microfinance?The term "microfinance" describes the range of financial products (such as

microloans, micro savings and micro-insurance products) that microfinance

institutions (MFIs) offer to their clients. Microfinance began in the 1970s when

social entrepreneurs began lending money on a large scale to the working poor.

One individual who gained worldwide recognition for his work in microfinance is

professor Muhammad Yunus who, with Grameen Bank, won the 2006 Nobel Peace

Prize. Yunas and Grameen Bank demonstrated that the poor have the ability to pull

themselves out of poverty. Yunus also demonstrated that loans made to the

working poor, if properly structured, had very high repayment rates. His work

caught the attention of both social engineers and profit-seeking investors.

Historically, the goal of microfinance was the alleviation of poverty. For many

years, microfinance had this primary social objective and so traditional MFIs

consisted only of non-governmental organizations (NGO), specialized

microfinance banks and public sector banks. More recently, the marketplace has

been evolving. For example, some non-profit MFIs are transforming themselves

into profit-seeking institutions to achieve greater strength, sustainability and

market reach. They are being joined in the microfinance marketplace by consumer

finance companies, like GE Finance and Citi Finance. "Big-box" consumer

retailers, like Wal-Mart, Elektra and Tesco are beginning to emerge as consumer

lenders and a few are venturing into microfinance.
http://www.investopedia.com/terms/m/microfinance.asphttp://www.grameen-info.org/http://www.grameen-info.org/http://www.investopedia.com/terms/m/microfinance.asp


3/26

Although most MFIs still consider poverty alleviation the primary goal, selling

more products to more consumers is the primary motivation of many new entrants.

Microfinance Products and ServicesThe following products and services are currently being offered by MFIs:

Microloans:Microloans (also known as microcredit) are loans that have a small value; most

loans are less than $100 in size. These loans are generally issued to

finance entrepreneurs who run micro-enterprises in developing countries.

Examples of micro-enterprises include basket-making, sewing, street vending and

raising poultry. The average global interest rate charged on micro-loans is about

35%. Although this may sound high, it is much lower than other available

alternatives (such as informal local money lenders). Moreover, MFIs must charge
http://www.investopedia.com/terms/m/microcredit.asphttp://www.investopedia.com/terms/i/interestrate.asphttp://www.investopedia.com/terms/m/microcredit.asphttp://www.investopedia.com/terms/i/interestrate.asp


4/26

interest rates that cover the higher costs associated with processing the labor-

intensive micro-loan transactions.

Microsavings:Microsavings accounts allow individuals to store small amounts of money for

future use without minimum balance requirements. Like traditional savings

accounts in developed nations, micro-savings accounts are tapped by the saver

for life needs such as weddings, funerals and old-age supplementary income.

Micro-Insurance:Individuals living in developing nations have more risks and uncertainties in

their lives. For example, there is more direct exposure to natural disasters, such

as mudslides, and more health-related risks, such as communicable diseases.

Micro-insurance, like its non-micro counterpart, pools risks and helps provide

risk management. But unlike its traditional counterpart, micro-insurance allows

for insurance policies that have very small premiums and policy amounts.

Examples of micro-insurance policies include crop insurance and policies that

cover outstanding balances of micro-loans in the event a borrower dies. Due to

the high administrative expense ratios, micro-insurance is most efficient for

MFIs whenpremiums are collected together with microloan repayments.
http://www.investopedia.com/terms/s/savingsaccount.asphttp://www.investopedia.com/terms/s/savingsaccount.asphttp://www.investopedia.com/terms/e/expenseratio.asphttp://www.investopedia.com/terms/p/premium.asphttp://www.investopedia.com/terms/s/savingsaccount.asphttp://www.investopedia.com/terms/s/savingsaccount.asphttp://www.investopedia.com/terms/e/expenseratio.asphttp://www.investopedia.com/terms/p/premium.asp


5/26

What does microfinance mean for you?The development and growth of the microfinance market affects more than justthose who are engaging in or contemplating microfinance services. Here it is how

it may affect you:

As an investor:

Return-focused institutional investors are now making microfinance-related

investments. In addition, major ratings agencies are rating microfinance

transactions. For example, Morgan Stanley issued a microfinance backed bond,

which contained tranches and was rated "AA" by S&P. This shows that

microfinance is beginning to provide investment opportunities for all investors.

The Micro Banking Bulletin reports that 63 of the world's top MFIs have an

average return of about 2.5% of total assets. Local and regional banks are

generally the first to integrate microfinance investments into their portfolios,
http://www.investopedia.com/terms/t/tranches.asphttp://www.investopedia.com/terms/b/bondrating.asphttp://www.mixmbb.org/en/http://www.investopedia.com/terms/t/tranches.asphttp://www.investopedia.com/terms/b/bondrating.asphttp://www.mixmbb.org/en/


6/26

while large international banks currently prefer to provide financing to other

banks, MFIs or NGOs.

As a finance professional:

Microfinance requires highly specialized financial knowledge as well as a unique

combination of skills, such as knowledge of social science, local languages and

customs. New careers are emerging to fit these unique demands. For finance

professionals, this means that new careers are opening up for those who have this

unique combinations of skills and experiences. Moreover, traditional career roles

are blurring as microfinance brings together professionals with varied

backgrounds to work in collaborative teams. For example, development

professionals can now be found working side by side with venture capitalists. A

wide range of microfinance career opportunities can be found at Microfinance

Gateway.

As an individual:Some believe that we are living in a time when poverty may be eradicated.

Studies support that belief. According to the Virtual Library on Microcredit,

during an eight-year period, among the poorest in Bangladesh with no credit

service of any type, only 4% pulled themselves above the poverty line. But with

individuals and families with microcredit from an MFI, more than 48% rose

above the poverty line. What poverty eradication means to you as an individual

depends largely upon your personal philosophy. You might welcome it as a key

achievement in the history of humanity. You also might celebrate the possibility

that we each can all buy and sell to one another. Individuals who seek to be a

part of this poverty eradication phenomenon may now loan money to a micro-

entrepreneur in another part of the world through the non-profit online

service Kiva.
http://www.investopedia.com/terms/v/venturecapitalist.asphttp://www.microfinancegateway.org/http://www.microfinancegateway.org/http://www.kiva.org/http://www.investopedia.com/terms/v/venturecapitalist.asphttp://www.microfinancegateway.org/http://www.microfinancegateway.org/http://www.kiva.org/


7/26

HOW IT WORKSAccording to the International Fund for Agricultural Development (IFAD), a

specialized agency of the United Nations, 65 of the world's top microfinance

issuers got an average rate of return of 2.5% of total assets, which is comparably to

returns in the commercial banking sector. So how do these organizations get

people with virtually no personal assets to make good on loans?

Many microfinance proprietors look to educate the destitute groups they serve

about how basic banking services work. In many instances, people looking to join

microfinance organizations are first required to take a basic money management

class. Lessons focus on ways to develop savings, debt management, how banks

work, how tobudget and how to manage cash flow.

Once educated on how the process works, customers are then allowed access to

loans. Just as one would find at a traditional bank, a loan officerapproves and

helps borrowers with loan applications and oversight. The typical loan - usually

$100 or less -does not seem like much too many in the developed world, but to

people trapped in rural poverty, this figure is enough to start a business or engage

in other profitable activities. In most cases, many potential borrowers cannot offer

any collateral.

As a buffer, microlending operations often pool people seeking loans together.

After receiving loans, recipients repay their debts together. Because the success of

the program depends on everyone's contributions, a form of peer pressure exists to

help ensure loan repayment. For example, if an individual is having trouble using

his or her money to start a business, that person can seek help from other group

members or from the loan officer. Through repayment, loan recipients start to

develop credit, allowing them to obtain larger loans down the line. Also, many

microfinance operations require loan recipients to set aside parts of their income
http://www.investopedia.com/terms/b/budget.asphttp://www.investopedia.com/terms/c/cashflow.asphttp://www.investopedia.com/terms/l/loanofficer.asphttp://www.investopedia.com/terms/c/collateral.asphttp://www.investopedia.com/terms/b/budget.asphttp://www.investopedia.com/terms/c/cashflow.asphttp://www.investopedia.com/terms/l/loanofficer.asphttp://www.investopedia.com/terms/c/collateral.asp


8/26

toward a savings account used as insurance in case of a loan default. Others also

require borrowers to allocate a portion of their income to a personal savings

account for you at a later date.

ROLE OF MICROFINANCE

In a world where almost half the population lives on less than $2.50 a

day, microfinance is one of the better tool for poverty alleviation, economic growth

and development in emerging economies. Loans offer the same benefits to major

world economies that face growth problems.

Microfinance Role in Economic GrowthHaving said that, one must realize microfinance is not impervious to impact of the

global financial crisis. Instead, we realize that loans can help lower-income groups

setup and grow the small businesses, which generate income and employment that

helps their communities and their economies.

Poor people do not want to stay poor. Like everyone else, they wish to put an end to

their economic hardship and exploitation by either working or exploring self-

employment. In the latter case, money can be raised through friends and family,

gathered over time through savings, or obtained through loans fron microfinance

insitutions. You can read about this in detail at theRadical Frontiers Blog.
http://microfinancehub.com/2010/01/31/what-is-microfinance-defition-sources-problems/http://microfinancehub.com/2010/02/20/microfinance-and-the-global-economic-crisis/http://microfinancehub.com/2010/02/20/microfinance-and-the-global-economic-crisis/http://radicalfrontiers.wordpress.com/2010/02/01/microfinance-as-self-help-opportunity/http://microfinancehub.com/2010/01/31/what-is-microfinance-defition-sources-problems/http://microfinancehub.com/2010/02/20/microfinance-and-the-global-economic-crisis/http://microfinancehub.com/2010/02/20/microfinance-and-the-global-economic-crisis/http://radicalfrontiers.wordpress.com/2010/02/01/microfinance-as-self-help-opportunity/


9/26

Naturally, small business owners are not afraid of failure and their resilience, grit

and determination has helped them march through the current economic recession,

marked by a collapse of debt instruments. Bear in mind that all these are common

characteristics of entrepreneurs.

Having said that, many micro ventures do not produce the inflated results we expect

of them and some studies show microfinance is not all that it promises to be. This

may be because of high interest rates on these loans, orother problems faced by

microfinance, or even because of a shortage oftools to measure the social impact of

microfinance.

ROLE OF MICROFINANCE FOR PROMOTINGINTEGRATED RURAL DEVELOPMENT ANDPOVERTY ALLEVIATION

The concept and role of micro financing is well known for social upliftment as

well as for the development of rural and backward areas. Considerable efforts are

being made at the public and private sectors to bring in enough number of

technologies in the rural areas for their implementation and use through micro

financing for the overall development. However, support of micro financing

agencies including banks is not reaching at the grass route levels and therefore,

most of the developmental programmes get diluted or ineffective and many a times

they don't even take off. In the rural areas people are not much aware about the

micro financial schemes and their benefits. Hence, in order to provide sustainable

rural development and progressive poverty alleviation the role of micro financing

agencies becomes an important in the context of current scenario. In the present

communication the whole mechanism of micro finance, its role to achieve

sustainable rural development. All over the world the role of micro financing for

rural development and alleviating poverty is well known and in many a cases it has
http://microfinancehub.com/category/microfinance-challenges/http://microfinancehub.com/category/microfinance-challenges/http://microfinancehub.com/2010/02/07/microfinance-%E2%80%93-measuring-its-social-impact/http://microfinancehub.com/2010/02/07/microfinance-%E2%80%93-measuring-its-social-impact/http://microfinancehub.com/category/microfinance-challenges/http://microfinancehub.com/category/microfinance-challenges/http://microfinancehub.com/2010/02/07/microfinance-%E2%80%93-measuring-its-social-impact/http://microfinancehub.com/2010/02/07/microfinance-%E2%80%93-measuring-its-social-impact/


10/26

been proved that well organized micro financing policies have helped in achieving

sustainable development of the rural sector. During 11th five year plan

Government of India also emphasized development of the rural sector through

poverty alleviation and achieves more than 8% economic growth. For this purposeappropriate financial budget allocation has also been announced. For achieving this

goal, both public and private sectors have to play important role in macro and

micro financing.

Many underdeveloped countries like Afghanistan, Tajikistan, Sierra Leone, Bosnia

and Herzegovina have emphasized how micro financing stimulates growth and

development of the rural section in their respective countries (from internet). In

India more than 70% of the population lives in villages and most of these villages

are underdeveloped. Research and development sector in our country brings

number of green and eco-friendly technologies every year. Implementation of these

technologies in the rural sector can bring radical change in the rural economy

which may also lead to poverty alleviation, create employment opportunities and

generate or stimulate good growth. However, for implementing these technologies

micro financing through public and private sector agencies is the need of the hour.In the present paper efforts have been made to critically analyze all the issues

focusing how micro financing can bring mutational changes in the rural economy

for overall benefits to all the communities and weaker sections of the society.

Green technology for rural development

The green technologies are those technologies which are eco-friendly. In otherwords, the technologies developed by using natural resources and when adopted

will not create any nuisance to the environment. In India there are number of R &D scientific organizations like Council of Scientific and Industrial Research(CSIR), Indian Council of Agricultural Research (ICAR), Indian Council ofMedical Research (ICMR), Indian Institute of Technology (IIT), ConventionalUniversities, Agricultural Universities, Baba Atomic Research Centre (BARC) andnumber of private industrial research agencies are contributing in evolving one orother technology which is rather eco-friendly and can be defined as green


11/26

technology. Depending on the necessity and challenges that are required for theoverall development of the rural sector we need to bring in and implement at leastsome of the green technologies in such locations. For this purpose micro financingis very much needed for applications of green technologies. Integration of microfinancing and technological application will definitely stimulate growth and overalldevelopment of the rural sector. Today we have number of green technologiesnamely renewable energy from wind, water, tidal energy, solar energy,development of bio-fuels from natural resources, bio-gas plants, bio-fertilizers,

bio-manures, bio-pesticides, bio-waste recycling, bio-conservation, cattle farmingand aquaculture, dairy and dairy products, pollution control and water purification,water conservation, rejuvenation for plantation and development of forest etc.After witnessing a dip in 2009 on account of global financial crisis, the greensector in India is once again attracting the attention of investors and banks. Threereasons have been thought of which are favorable for investors in ruralsectori.e.high REO's (returns on equity), increasing investor comfort withrenewable generation risk, and strong commitment from the central government toensure renewable feasibility. The growth of the green sector is substantiated by

pace of lending support financially through banks for implementing greentechnology projects. Recently Yes bank and State Bank of India have set asidecertain percentage allocation of funds to implement projects related to cleantechnologies. For example Yes Bank has offered Rs 700 crores for a projectinvolving management of municipal solid waste and its disposal in anenvironmentally friendly manner. State Bank of India has tied up with ManagingEmission, a Mumbai-based company involved in business of setting up projects

for renewable energy and energy efficiency with carbon embedded assets, toprovide 20, 000 energy efficient plants to rural India through micro finance loans.The project involves building bio-gas plants at farmers houses. The project aims atreducing greenhouse emission by saving conventional fuel such as fire wood, LPGand kerosene.Under the project, farmers contribute 50% of the cost and the balance50% is financed through low interest micro finance loans from the bank. Therepayment of the micro finance loan is then structured in a manner by which theincome received from carbon credits is used for repayment.

Information, awareness and technology selectionThough number of green technologies is available, all these cannot beimplemented each and every where. Depending upon resources available andgeographical and climatic condition, location specific technologies we need to

bring in and implemented. In such efforts we may have to critically examinelocation specific technologies and their feasibility for implementation. Tofamiliarize about the technologies and develop skill there is again need for training


12/26

and awareness. For this purpose regular training programmes have to be organizedthrough various agencies and create a kind of awareness and develop expertise.This kind of exercise is very much needed for successful implementation oftechnological applications. Micro financing including lending and repayment rulesand its awareness should be the part of such training programmes.

Micro finance for technology applications

Microfinance is defined as provisions of thrift, credit and other financial servicesand products of very small amount to the poor in rural, semi-urban and urban areasfor enabling them to raise their income levels and improve living standard.Microfinance is provided in varying context either to individuals or groups rangingfrom personal micro credit to small enterprise support and rural finance.


13/26

MICROFINANCE INSTITUTIONS IN INDIA Currently, roughly 66% of the micro finance supply is via the Self Help

Group (SHG)-bank linkage route.

However, MFIs grow faster now, in terms of number of clients and credit

flow.

The share of MFIs is rapidly growing.

There are about 800 MFIs in India (NABARD).

However the top 15 MFIs account for about 70% of the credit through MFIs.

SKS MFI India

Indias largest and one of the fastest growing microfinance organizations. Current Outreach: Members: 78 lakhs

Branches : 2407

Amount Disbursed: INR- 19841 crore ( USD 4421 million)

The only MFI in India to be listed on the stock Exchange.

Loan amt: Rs. 20,00-100,000 .

Loan amt for poor women : Rs. 2000 12,000

Commercial Banks lend money to SKS at 11- 14% interest to borrow funds.

Interest rates in the sates of Andhra Pradesh, Karnataka and Orissa at 26.7%.

Other states in India at 31.4%.


14/26

MICROFINANCE REGULATIONS AND POLICY

The government is likely to introduce a Bill that seeks to make it mandatory for allmicro-finance institutions to be registered with the Reserve Bank of India and entruststhe task of regulating the sector to the central bank in the Winter Session ofParliament.The Finance Ministry is in discussion with all concerned stakeholders forfine-tuning the draft Micro Financial Sector (Development and Regulation) Bill, 2011,official sources said.The ministry hopes to table the Bill in the upcoming Winter

Session of Parliament, sources said.

The draft Micro Financial Sector (Development and Regulation) Bill, 2011, wascirculated for public comments in July this year.In an earlier Bill, it was proposed thatthe National Bank for Agriculture and Rural Development (NABARD) would be theregulator of the sector.The government had introduced the Micro Financial Sector Billin the Lok Sabha in March, 2007. However, the Bill lapsed when the term of the 14thLok Sabha expired in 2009.The latest draft Bill proposes to make it mandatory formicro-finance institutions to be registered with the Reserve Bank and have minimumnet-owned funds of Rs 5 lakh.

In addition, a Micro Finance Development Council will be set up to advise thegovernment on formulation of policies, schemes and other measures required in theinterest of orderly growth and development of the sector and micro-finance institutionswith a view to promote financial inclusion.The council will comprise members not

below the rank of Executive Director from NABARD, National Housing Bank, RBI andSIDBI. In addition, joint secretaries from the Ministry of Finance and the Ministry ofRural Development will also be its members.

The draft Bill also proposes that any micro-finance institution which is not a company

registered under the Companies Act, 1956, and which becomes a systemically importantmicro-finance institution shall convert its institution into a company registered under theCompanies Act, 1956, with or without a licence, under Section 25 of the Act.Thisshould happen within six months from the date of the balance sheet that shows the MFIhas become a systematically important micro-finance institution in terms of the rules

prescribed by the central government, the draft Bill said.


15/26

The RBI may pass an order directing a micro-finance institution to cease and desistfrom carrying out micro-financing if it is found acting in manner prejudicial to theinterest of its clients or depositors.The Reserve Bank will cancel the certificate ofregistration granted to a micro-finance institution if it fails to comply with the directivesor condition, the draft Bill states.

The microfinance crisis in Andhra Pradesh analysis of the APAct

The Andhra Pradesh Microfinance Institutions (Regulation of Money Lending) Act, 2010In October 2010, with no warning or consultation with stakeholders, the Government ofAndhra Pradesh issued the Andhra Pradesh Microfinance Institutions (Regulation of

Money Lending) Act, 2010 effectively shutting down all private sector microfinanceoperations in the state. The AP Act does not however apply to APs government-backedmicrofinance business which directly competes with private sector MFIs. This was amajor blow to the entire microfinance industry as Andhra Pradesh, widely regarded as the

birthplace of private sector microfinance, accounts for over 40% of all loans by MFIsacross India according to some estimates.

To justify its extraordinary action against private sector microfinance, the AP governmentclaimed to be protecting the poor from what they claimed to be rapacious lending

practices by the MFIs. But, as discussed below, the facts prove otherwise. Moreover, by

its own terms, the AP Act aims to protect the governments own microfinance programswhich had been losing market share to the more efficient and better run MFIs:Whereas these SHGs are being exploited by private Micro Finance Institutions (MFIs)through usuriousinterest rates and coercive means of recovery resulting in their impoverishment & insome cases leading to suicides, it is expedient to make provisions for protecting theinterests of the SHGs, by regulating the money lending transactions by the money lendingMFIs and to achieve greater transparency in such transactions in the State of AndhraPradesh.

No-one would object to protecting the poor from exploitation by institutions chargingusurious rates, practicing coercive recovery techniques, or driving clients to suicide.However, was there ever any real substance behind these alarming claims? Indeed, whenone looks for evidence to substantiate these allegations, it quickly becomes apparent thatthe services being provided by private sector MFIs are valued by their clients, and areneither usurious nor violent. On the contrary, given the size of the MFI sector, tales ofexploitation are remarkably rare.


16/26

What is to be done?Prior to the enactment of the AP Act prohibiting the normal operations of the

private sector MFIs, repayment rates were over 98% and the industry was healthyand growing rapidly. The source of the current crisis is also the solution to thecurrent crisis namely the repeal of the AP Act.

Urgently repeal the AP Act. Immediately supersede, suspend or repeal the APAct, which is the source of thecrisis. The only way to address the extensivedamage being done by the Acts effective prohibition against private sector MFIoperations is to remove it. Removal would achieve the following goals: Allow MFIs to collect the amounts owed to them in AP

Allow the MFIs to meet their commitments to lenders

Avoid the wholesale destruction of several leading MFIs Avert a banking crisis and Aid the rural poor by ensuring that they retain

access to microfinance services.

Removal would also redress the current balance of power issue, ensuring thatregulation of those MFIs classified as NBFCs is returned to its rightfulcontroller, namely the RBI.

Consult with equity stakeholders to ensure the new regulations do no harm. The

RBI and central government must take the time to do a full analysis with inputfrom all stakeholders to ensure that the regulations ultimately introduced are

beneficial and that any unintended consequences have been identified and fullyconsidered. A cautionary tale regarding investment in India has unquestionablyalready been written and how the RBI and central government craft the newregulations will ultimately determine whether the flow of equity and debt capitalto the microfinance sector is severed for years to come.

Facilitate fair restructuring of loans to MFIs to allow time for recovery. It isclear that if any meaningful recoveries are to take place, lenders and MFIs mustwork together through a mutually supportive approach to achieve a mutually

beneficial outcome. With an exposure of over Rs 6,500 crore ($1.470BN)outstanding in AP, MFIs represent the only viable way for lenders to recovertheir loans to MFIs, given their relationship with the end customers. MFIs must

be given the time to undo the damage inflicted by the AP Act, and to recover theloans from borrowers. In this regard, the terms and conditions applicable to therepayment of loans admitted by the CDR Cell for restructuring must be


17/26

favorable to the MFIs to ensure they are not penalized due to the externalbusiness factors created by the AP Act.

CRITICISIM FACED BY MICROFINANCE


18/26

Most criticisms of microfinance have actually been criticisms of microcredit,delivered in the absence of other microfinance services such as savings, remittances,

payments and insurance.

For example, there has been much criticism of the high interest rates charged to

borrowers. The real average portfolio yield cited by the sample of 704 microfinanceinstitutions that voluntarily submitted reports to the MicroBanking Bulletin in 2006was 22.3% annually. However, annual rates charged to clients are higher, as they alsoinclude local inflation and the bad debt expenses of the microfinance institution.Muhammad Yunus has recently made much of this point, and in his latest

book argues that microfinance institutions that charge more than 15% above theirlong-term operating costs should face penalties.

Milford Bateman, the author ofWhy Doesn't Microfinance Work?, argues thatmicrocredit offers only an "illusion of poverty reduction". "As in any lottery or gameof chance, a few in poverty do manage to establish microenterprises that produce a

decent living," he argues, but "these isolated and often temporary positives areswamped by the largely overlooked negatives." Bateman concludes that "Theinternational development community is now faced with the reality that, overall,microfinance has been a development policy blunder of quite historic proportions."

The role of donors has also been questioned. The Consultative Group to Assist thePoor (CGAP) recently commented that "a large proportion of the money they spend isnot effective, either because it gets hung up in unsuccessful and often complicatedfunding mechanisms (for example, a government apex facility), or it goes to partnersthat are not held accountable for performance. In some cases, poorly conceived

programs have retarded the development of inclusive financial systems by distortingmarkets and displacing domestic commercial initiatives with cheap or free money."

There has also been criticism of microlenders for not taking more responsibility forthe working conditions of poor households, particularly when borrowers becomequasi-wage labourers, selling crafts or agricultural produce through an organizationcontrolled by the MFI. The desire of MFIs to help their borrower diversify andincrease their incomes has sparked this type of relationship in several countries, mostnotably Bangladesh, where hundreds of thousands of borrowers effectively work aswage labourers for the marketing subsidiaries ofGrameen BankorBRAC. Criticsmaintain that there are few if any rules or standards in these cases governing working

hours, holidays, working conditions, safety or child labour, and few inspectionregimes to correct abuses. Some of these concerns have been taken up

by unions and socially responsible investment advocates.

For example,BusinessWeekreported that some Mexicans are stumbling with terms ofnewly available funding.
http://en.wikipedia.org/wiki/Muhammad_Yunushttp://en.wikipedia.org/wiki/Bangladeshhttp://en.wikipedia.org/wiki/Grameen_Bankhttp://en.wikipedia.org/wiki/BRAC_(NGO)http://en.wikipedia.org/wiki/Trade_unionhttp://en.wikipedia.org/wiki/Socially_responsible_investinghttp://en.wikipedia.org/wiki/BusinessWeekhttp://en.wikipedia.org/wiki/Muhammad_Yunushttp://en.wikipedia.org/wiki/Bangladeshhttp://en.wikipedia.org/wiki/Grameen_Bankhttp://en.wikipedia.org/wiki/BRAC_(NGO)http://en.wikipedia.org/wiki/Trade_unionhttp://en.wikipedia.org/wiki/Socially_responsible_investinghttp://en.wikipedia.org/wiki/BusinessWeek


19/26

Other criticism was raised by the IPO (Initial Public Offering) of a MexicanMFI Banco Compartamos in 2007. As the company put its shares on Mexican StockExchange it was able to generate very high profits that were achieved by risinginterest rates on their micro-loans that at some point reached 86% per year. In July2010 India's biggest MFI, SKS Microfinance also went public. In bothinstances Muhammad Yunus publicly stated his disagreement, saying that the poorshould be the only beneficiaries of microfinance.Microcredit has been blamed formany suicides in India: aggressive lending by microcredit companies in AndhraPradesh is said to have resulted in over 80 deaths in 2010.

Some problems with microcredit are mistakenly alleged in The Micro Debt, a film bythe Danish journalist Tom Heinemann.After a thorough investigation in December2010 by the Norwegian Foreign Ministry, the alleged problems have been proven to

be false and no further actions against the Grameen Bank and its founder,Muhammad Yunnis, have been taken. The documentary by Heinemann also looks at

the effectiveness of Grameen Bank and alleges that it has little impact on poverty byhighlighting the purported continued poverty of Sufiya Begum, the original loanrecipient of Grameen, in Jobra Village. This allegation is disputed, since documentarymaker Gayle Ferraro found the woman alive and well, confirming the originalGrameen story.

PACT OF MICROFINANCE ON ECONOMY

Growth alone is not enough if it does not produce a flow of benefits that are sufficientlywide-spread. We, therefore, need a growth process that is muchmore inclusive
http://en.wikipedia.org/wiki/Compartamos_Bancohttp://en.wikipedia.org/wiki/SKS_Microfinancehttp://en.wikipedia.org/wiki/Muhammad_Yunushttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/Compartamos_Bancohttp://en.wikipedia.org/wiki/SKS_Microfinancehttp://en.wikipedia.org/wiki/Muhammad_Yunushttp://en.wikipedia.org/wiki/Andhra_Pradeshhttp://en.wikipedia.org/wiki/Andhra_Pradesh


20/26

This is what our Prime Minister, Dr. Manmohan Singh proclaimed in a speech on the eveof declaring theBudgetlast year. In the 21st Century, the Indian Economy is one of thefastest growing economies in the world with a growth rate of about 8%. Nations acrossthe world have deemedIndia as the next economic power of the world. There isdefinitely a sense of optimism and aggression that our economy is portraying.

However, this is an India which has been split into two worlds. One world, which ishungry for more and is touching the skies, whose appetite has stunned the world, and theother, in which people are committing suicide because they cant get two square meals aday, where levels ofeducation, sanitation and health are comparable to those of SubSaharan Africa. The growth rate in India has been largely exclusive and has not takeninto account the state of rural areas. Ranked at 128 in the HDI index, India is a classiccase of high growth and low development. In order to sustain such a high growth rate orincrease it, we have to develop the roots of the country. These roots lie in the rural areasof India amongst the millions of villages. If India truly wants to shine in the world, itwill have to give importance to rural development.

One of the most powerful tools to do the same is through Microfinance. Having beingimplemented successfully in countries like Bangladesh, Bolivia, Kenya, Latvia and manymore; Microfinance has been able to change the face of the economy in these countries.This is a concept which has been prevalent in India for quite some time but has never

been given so much importance and has not been exploited enough to gain anythingsubstantial out of it. The Government must understand that thepoorstay poor, not

because they are lazy but because they have no access to capital. By providing capital to

them, the government can ensure rural as well as urban development.

But what is microfinance? Microfinance is the provision of a broad range of financialservices such as deposits, loans, payment services, money transfers and insurance to poor

people so that they can they can improve their well being.Till date, a large number of poor people remain outside FormalBankingSystem.The rural penetration in banks is less than 18% and the existing banking policies are farfrom meeting their needs. About 75 million households live below thepoverty line andthe annual credit demand by the poor exceeds Rs 70,000 crores, out of which thecumulative disbursements is about Rs. 8000 crores. Only 5 % of rural poor have access to

microfinance and the share of Microfinance in total credit of Indian Banking system isless than 1%.However, there is a growing popularity of microfinance in India with anexpected growth rate of 20% in the next 5 years. All these facts and figures prove that theimpact of such an ingenious tool is not even close to meeting the tremendous demand forlow scale financial services. While the Microfinance Institutions (MFIs) have shown thatserving the poor is not an unviable proposition, there are issues which have constrainedMFIs while scaling up. These include limited access to equity, lack of an appropriate
http://theviewspaper.net/bigpage/flexible-budget/http://theviewspaper.net/a-case-for-the-democracy-in-india/http://theviewspaper.net/education-system-of-india-its-functions-drawbacks-and-its-contribution/http://theviewspaper.net/what-a-10-year-old-nri-taught-me-about-poverty-in-india/http://theviewspaper.net/bigpage/banking-sector-in-india/http://theviewspaper.net/education-system-of-india-its-functions-drawbacks-and-its-contribution/http://theviewspaper.net/what-a-10-year-old-nri-taught-me-about-poverty-in-india/http://theviewspaper.net/bigpage/flexible-budget/http://theviewspaper.net/a-case-for-the-democracy-in-india/http://theviewspaper.net/education-system-of-india-its-functions-drawbacks-and-its-contribution/http://theviewspaper.net/what-a-10-year-old-nri-taught-me-about-poverty-in-india/http://theviewspaper.net/bigpage/banking-sector-in-india/http://theviewspaper.net/education-system-of-india-its-functions-drawbacks-and-its-contribution/http://theviewspaper.net/what-a-10-year-old-nri-taught-me-about-poverty-in-india/


21/26

legal apparatus and a sense of doubt and fear in the minds of private firms which believethat MF is full of risks and uncertainties.

What the Government needs to do, in this financial year, is provide incentives to firmsand companies to go ahead and set up MFIs in rural India.They need to alter the entire framework so that the environment becomes more conduciveto firms. Even NABARD, the apex institute for rural finance, should play a very activerole in promoting such kinds of private undertakings. MFIs basically act as anintermediary between the financial institutions and Self Help Groups (SHGs). This linkneeds to be strengthened. The Eleventh five year Plan aims at achieving a 4% growth ratein the agricultural sector. Even though this may seem like an uphill task, it is well withinour reach if strategies like microfinance are given more importance. Microfinance as atool is so useful that it serves more purposes than one. Apart from improving health andeducation standards, it also ensuresgender empowerment. The latter is possible as large

parts of these MF deals take place through women.

Earlier, India believed in the trickle down effect and assumed that a very high growthrate would lead to more development and would consequently raise the standards ofliving. However, what has happened is quite the contrary. The Government needs to learnfrom its past mistakes and implement a down to up approach which involvesstrengthening the base of the country by mobilizing funds in rural India.The poor stay poor, not because they are lazy but because they have no access tocapital. The flaw isnt in the concept, but in its implementation.

FUTURE OF MICROFINANCE

The vision of microfinance is quite simple - to create systemic change in financialsystems worldwide. Instead of the exclusive financial systems that have for decades

benefited and protected the wealthy, microfinance intends that they serve theimpoverished majorities, help lift them out of poverty, and make them full

participants in their country's social and economic development. In the next ten years,our task is to make certain that millions of poor men and women currently unserved
http://theviewspaper.net/bigpage/gender-empowerment/http://theviewspaper.net/bigpage/gender-empowerment/


22/26

can access financial services. How do we get there? As we look forward, I will focuson what institutional channels we will use to extend financial services, who we willreach, what innovations we will need, and what role governments and donors willneed to play.

Before we consider what developments in microfinance we can expect by 2015 andwhat we need to have in place to reach our goal, let us examine where we are today.With that end in mind, ACCION sponsored a study in early 2005, "The Profile ofMicrofinance in Latin American in Ten Years: Vision & Characteristics[2]," co-authored by Beatriz Marulanda of Colombia and myself. The study explores the

principle tendencies that characterize microfinance and its development in the comingten years.

We noted the consolidation of two approaches to the provision of financial services tolow-income people in the region. They both have commercial criteria, which we thinkwill prevail as a model in the coming years. We see first that MFIs still primarily

operating as NGOs will undergo "upscaling," or transformation into regulatedentities. At the same time, commercial banks entering the microenterprise sector willadopt "downscaling" to provide a range of financial services to the poor. This realitycreates important opportunities for microfinance and new challenges as well.

The study also demonstrated an ongoing (though evolving) role for NGOs asinnovators in the field, developing new ways to extend credit to population sectors asyet not adequately served, including those in the poorest levels of society, people inrural areas, and those involved in small animal husbandry or agriculture. In countrieswhere regulated entities have significant market penetration, we see a crucial role for

NGOs in the provision of other services such as training and business advisoryservices for microentrepreneurs.

As we have learned more about the financial needs of microentrepreneurs, it is clearthat the target market for microfinance should be the entire microenterprisehousehold. In addition, in Latin America, the target market is expanding to includelow-income salaried workers. Within this expanded market, the industry agrees onthe importance of offering a wide range of integrated financial services, including:ATMs and other aids to transactional efficiency, savings accounts, credit productssuch as consumer and housing loans, and insurance policies that would allow familiesto protect themselves against potential misfortune.

ACCION's experience in Latin America and those of other leading MFIs around theworld inform the next ten years. I emphasize here the leadingmicrofinanceinstitutions. Estimates indicate that there are 7,000 to 10,000 microfinanceinstitutions worldwide, but in fact, just 150 to 200 of them are serving the vastmajority of current clients. These leading MFIs share important commonalities: 1) arange of products developed specifically for their clientele; 2) the ability (and agility)to operate in competitive environments, and 3) consistent maintenance of a portfolio
http://www.uncdf.org/english/microfinance/pubs/newsletter/pages/2005_10/news_comm.phphttp://www.uncdf.org/english/microfinance/pubs/newsletter/pages/2005_10/news_comm.php


23/26

at risk of less than five percent and repayment of 97-98 percent or higher. Theiroverall operation falls under what we call the "commercial approach" tomicrofinance, an approach that most industry players now embrace because theyunderstand that to make a real impact on poverty, microfinance institutions must be

permanent, economically viable entities capable of reaching ever-increasing numbersof people.

The provision of financial services to the poorest people does not have to becontradictory to commercialization. However, it is quite clear that microcredit canonly be provided to those people (or population segments) that have an establishedminimum capacity to repay a loan. Financial services for the poor are not a substitutefor critical social services that are the responsibility of governments.

CHALLENGES REMAINING

A World Bank study assessing access to financial institutions found that amongstrural households in Andhra Pradesh and Uttar Pradesh, 59% lack access to depositaccount and 78% lack access to credit. Considering that the majority of the 360million poor households (urban and rural) lack access to formal financial services, thenumbers of customers to be reached, and the variety and quantum of services to be

provided are really large. Vijay Mahajan, Managing Director of BASICS, estimatedthat 90 million farm holdings, 30 million non-agricultural enterprises and 50 millionlandless households in India collectively need approx US$30 billion creditannually.This is about 5% of India's GDP and does not seem an unreasonableestimate.

A tiny segment of this US$30 billion potential market has been reached so far andthis is unlikely to be addressed by MFIs and NGOs alone. Reaching this marketrequires serious capital, technology and human resources. However, 80% of thefinancial sector is still controlled by public sector institutions. Competition,consolidation and convergence are all being discussed to improve efficiency andoutreach but significant opposition remains; for example, the All India BankEmployees Association has threatened to strike if the Government proceeds with its


24/26

policy of reducing its capital in public sector banks, merging public sector banks oreven enhancing Foreign Direct Investments in Indian private banks.

Many speakers at the Microfinance India conference talked about the significant andgrowing gap between surging growth in South India, which contrasts with the

stagnation in Eastern, Central and North Eastern India. Microfinance on its own isunlikely to be able to address formidable challenges of underdevelopment, poorinfrastructure and governance.

The Self Help Group movement is beginning to focus on issues of quality and therewere some interesting discussions on embedding social performance monitoring as a

part of the regular management information systems. At the time of the conference, aleading and responsible MFI was being investigated by the authorities for charging"high" rates of interest. Per unit transaction costs of small loans are high but manyopinion leaders still persist with the notion poor people cannot be charged rates thatare higher than commercial bank rates. The reality of the high transaction costs of

serving small customers, their continuing dependence on the informal sector, the factthat most bankers shy away from retailing to this market as a business opportunity,and the poor quality of services currently provided does not figure prominently in thisdiscourse. While the central bank has deregulated most interest rates, includinglending to and by MFIs, interest rates restrictions on commercial bank for retail loans

below US$5,000 (all microfinance and beyond) remain and caps on deposit rates alsodiscourage sharing transaction costs with customers. But most conference participantsaccepted the imperatives to build sustainable institutions.

There is still lot of policy focus on what activities are and are not allowed and not

enough operational freedom as yet for banks and financial institutions to design anddeliver programmes, and be responsible for their actions. Prescriptions and detailedcirculars often limit organisational innovation and market segmentation. As NachiketMor of ICICI Bank said at the conference, if the right indicators are monitored andoperational freedom and incentives are clear, both public and private banks have thecapacity to rapidly address the remaining challenges.


25/26

CONCLUSIONWe firmly believe that an integrated approach to servicing clients can enhance

microfinances effectiveness as a poverty alleviation tool. The benefits of this

approach are twofold.

First, by acting as a platform to deliver important social services along with

credit and financial services, MFIs can contribute to greater sustainability atthe client level. Integrating microfinance with social services such as health,

education and natural disaster relief or prevention addresses the other

contributing factors to poverty beyond the economic factor. In doing so, we

are providing clients with a comprehensive solution to minimize the risks

they face. By addressing the very issues that inhibit a clients chances of

succeeding with microfinance,

microfinance can increase its overall efficacy. Focusing on client

sustainability instead of institutional sustainability is how the field can

ensure that we are not just reaching more individuals, but that we areproviding them with the services they really need once we do reach them,

and that we accompany them throughout their journey to economic freedom.

Second, using microfinance as a platform to offer integrated services

increases economies of scope for all the organizations involved in trying to

service the same base of clienteles. With leveraged resources assets,

infrastructure, knowledge, distribution channels, etc. we can increase the

capacity of the service offerings to reach more clients and to reach themmore effectively. By partnering with other critical social providers and

businesses and serving as a platform, microfinance can offer other

organizations with a distribution channel to reach individuals in need, share

experiences in working in a particular region and community, and offer

countless other tangible and intangible products and services. This only

makes sense because microfinance is not in the business of maximizing


26/26

profits but rather of maximizing lives touched and transformed.

With that said, we encourage microfinance institutions to follow in the steps

of pioneers, such as the Grameen Bank, BRAC, Pro Mujer, Fonkoze and

Sareeram, in offering integrated services to their clients and to partner

wherever it makes sense.

The fight to alleviate poverty is too great a task for anyone or any one

discipline to combat it alone. As an entrenched and recognized leader in this

mission, microfinance can serve as a bridge beyond banking and

development. It can be the link that brings together the services and products

available today to

the people who need them most. Only through a collective effort will we

have the best chance of succeeding.

economics final word document

Documents