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Innovations in microfinance

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- V. Basil Hans1


Microfinance is one of the products of new developmental thinking and policy-making. It is a

unique amalgamation of industrial (including financial) and institutional reforms in the

present scenario of development economics. For the developing countries like India it has

come as a breakthrough in the philosophy and practices of poverty eradication, economic

empowerment and inclusive growth. Yet given the enormity of economic compulsions and

complexities in these countries, microfinance is an unfinished agenda. The main objective

of this paper, therefore, is to shift the focus from mere financial access to poverty

eradication and people’s empowerment, sifting the ‘performance’ of Microfinance

Institutions (MFIs) from their ‘popularity’.

The typical microfinance clients are low-income persons who do not have access to

formal financial institutions. Therefore, there is a tendency among development thinkers

and practioners to gauge the impact of MFIs purely in monetary terms, i.e. eradication of

income poverty. This is not only a partial view of the potential and purpose of microfinance

but also a cause of unbridled growth of MFIs. MFIs have the capacity and responsibility of

empower the most vulnerable, such as women, rural artisans etc; to allow the not-yet-

economically-active to become so; and to create community-based structures that build

mutual support and trust. The argument in this paper is that MFIs by releasing the true

potential of its members through social intermediation can ensure building an inclusive

society. MFIs have the advantage of combining the good features of both formal and

informal credit, even improving productivity and credit-worthiness through the ethics of

repayment. The plight of farmers in India and the scenario of suicides need to be examined

in this context.

For microfinance, therefore there is ethical and economic justification for looking

beyond income poverty or to move from financial intermediation to social intermediation. So

today we need to not only evolve new products or services under the gamut of microfinance

but also explore new frontiers of development, social and economic. This hinges on human

development in terms of infrastructure for health, education, skill and enterprise. This is also

in-keeping with the Millennium Development Goals (MDGs).

The positive signs are already visible. Several MFIs have recognised the need to be

socially relevant and active in order to be commercially viable and useful. The Kalinjiam

financial intermediation and social intermediation, to remove the economic and socio-

cultural barriers to empowerment, inclusion and development. Inclusive growth requires not

only physical, natural and human capital, but also social capital. Also further research is

need to a have a reality check of ‘what is really happening’, uniquely exploring both social

1 Dr. V. Basil Hans is Professor & Head of the Department of Economics and Dean, Faculty of Arts, St

The strength of microfinance (MF) has never been so keenly assessed than now. Its

potential and limitations need to be examined – theoretically and practically – not

just as an additional tool of credit for poverty eradication but also as a strategy of

building social capital in the country. It is in this backdrop that the present paper

assumes significance.

Microfinance (MF) is the product of new thinking and practice in development

economics. Microfinance movement is nothing short of a revolution in

developmental finance (Hans, n.d.). For the developing countries like India it has

come as a breakthrough in the philosophy and practices of poverty eradication,

economic empowerment and inclusive growth. At present there are more than 1000

microfinance institutions (MFIs) in India. Their role is nobler as they do “banking for

the poor”. They have also contributed to monetary liquidity and stability in the

economy. But we need to re-examine their role and performance not only in terms

of the avowed objective of poverty eradication but also in terms of the goal of

human development. They need to testify their functionality and performance in the

realm of social capital. They need to justify their presence and functions for socio-

cultural development of the country and how they can do this through social

intermediation. The objective of this paper, therefore, is to explore the possibility of

a symbiotic relationship between financial intermediation and social intermediation,

appropriate range of high quality financial services, including not just credit but also

savings, insurance, and fund transfers. It is thus the provision of a board range of

financial services such as deposits, loans, payment services, money transfers and

insurance to poor and low income households and their micro enterprises (Sriram

and Kumar, 2007).

The typical microfinance clients are low-income persons that do not have

access to formal financial institutions. Microfinance clients are typically self-

employed, often household-based entrepreneurs. In rural areas, they are usually

small farmers and others who are engaged in small income-generating activities

such as food processing and petty trade. In urban areas, microfinance activities are

more diverse and include shopkeepers, service providers, artisans, street vendors,

etc. Microfinance clients are poor and vulnerable non-poor who have a relatively

stable source of income (the Microfinance Gateway).

In the most simple terms, microfinance is “banking for the poor” and covers

micro credit, micro savings, micro insurance and remittances (Kandelwala, 2007).

Asian Development bank defines Microfinance as the provision of a broad range of

financial services such as deposits, loans, payment services, money transfers, and

insurance to poor and low-income households and, their micro enterprises (ADB,

2000). Ledgerwood defines microfinance as the provision of financial services like

savings, credit, insurance and payment services to low-income clients, including the

self-employed (Ledgerwood, 1999). Even the World Bank feels that the poor, i.e.

developed the “Jijenge Savings Account” and the Commercial Bank of Africa has

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provided the facility of mobile subscribers making micro payments (Goldin and

Reinert, 2006; Ramamurti, 2007).

In India the recent Task Force on Microfinance has defined microfinance as

the “provision of thrift, credit and other financial services and products of very small

amounts to the poor in rural, semi-urban or urban areas for enabling them to raise

their income levels and improve living standards. In the Indian context terms like

"small and marginal farmers", "rural artisans" and "economically weaker sections"

have been used to broadly define micro-finance customers (Basix, 2000;

Khandelwal, 2007).

Microfinance is a well-suited financial service for the micro entrepreneurs

helping them in running and expanding business. These definitions not only indicate

the scope of microfinance per se but also point out the need to balance the social

objectives with the financial objectives of microfinance. In fact the latter is really

challenging (DHAN Foundation, 2003).

Many MFIs are moving in the direction of commercialisation, specifically

since 2001. The difficult challenge in making the transition is not losing sight of the

central mission of serving poor populations. Admittedly there is a tension between

commercialisation and “mission drift”. This is seen in case of BURO Tangil

(Bangladesh) and Bank Rakyat’s Micro-business Division in Indonesia. Although the

process of transition is a difficult one those MFIs that make the transition will have

contributed significantly to the design of poverty-alleviating finance, no small

achievement (Goldin

and Reinert, 2006). Looking beyond income poverty then

Looking beyond income poverty entails going beyond micro credit. Provision

of savings, insurance and investment for businesses takes finance and financial

activities to the branches of economics other than consumption. There is all the

reason for MFIs to graduate as institutions of socio-economic development. Social

intermediation can come naturally to them. In the emerging economies they have

immense scope of functionality for developing not only financial assets but also

physical and human assets. Human needs, interactions and interrelationships,

infrastructural requirements are some of the orbits where they can operate with

ease in the larger interest of the society. While development of social capital is

required here demand-oriented as well as supply-driven MFIs both have handful of

jobs in these societies.

3. Microfinance and Financial Inclusion in India

Financial inclusion has been discussed in recent years, particularly in banking

circles with the main objective of delivering affordable banking services to the

disadvantaged sections of the society, i.e. clients who belong to the unorganised

segments of the economy and per force have to depend upon non-institutional

sources of finance (Rao, 2007; Rangarajan, 2007; Ray and Singh, 2006). Financial

exclusion is substantiated by the fact that as per the World Bank estimate in 1995,

in most developing countries the formal financial system reaches only the top 25 per

cent of the economically active population (Sinha, 2004). Microfinance is expected

element of cooperation. The pioneer and mainstream institutions involved in

providing microfinance in India have been the cooperatives, followed by the

Regional Rural Banks (RRBs), the National Bank for Agriculture and Rural

Development (NABARD), the Small Industries Development Bank of India (SIDBI),

and the Housing Development Finance Corporation (HDFC). Later the NGOs such

as self-help groups (SHGs) and the Non Banking Finance Companies (NBFCs)

entered the arena.

The idea of financial inclusion was in-built into group-lending system much

before the term became popular. Ela Bhatt established the Self-Employed Women's

Association (SEWA) in 1972. It was to bring poor women together and give them

ways to fight for their rights and earn better livings. Its membership grew to 7000

members in 1975 and to over now 700,000 now. The SEWA Cooperative Bank has

$1.5 million in working capital and more than 30,000 depositors with a loan return

rate of 94 per cent. SEWA's efforts to increase the bargaining power, economic

opportunities, health security, legal representation, and organisational abilities of

Indian women have brought dramatic improvements to hundreds of thousands of

lives and influenced similar initiatives around the globe (Ramakrishnan, 2007). The

rapid growth and finer success of SHGs has given a fillip to all-round development

of its members. They deserved to be called as revolutionary institutions in inclusive

growth. Revolution in terms of reach and diversity of products/services is a unique

feature and contribution of microfinance. The new frontiers of microfinance (or new

products or services in a limited sense) include social security plans such as health

microfinance is proving itself to be a successful phenomenon. How else would one

explain the case of private commercial banks willingness to support micro-credit

operations of NBFCs such as Share Microfin and Basix among others? Diversity

and viability are now the “added criteria” for profitability, financially and otherwise.

Two MFIs can be quoted as examples here: One, the Kalanjiam Initiative in Tamil

Nadu and the DWCRA in Andhra Pradesh. Under the Kalanjiam Community

Banking Programme (KCBP) promoted by DHAN Foundation, Federations existing

for more than three years have initiated many social development programmes –

housing, infrastructure, health, education, sanitation, drinking water, skill building,

insurance and business promotion. Its achievements in accessibility of credit and

basic infrastructure, (computer aided)-education, (online)-resource consultancy,

employment assistance, gender issues, leadership development etc. has been

commendable. The DWCRA has been appreciated by the likes of Bill Clinton and

Kofi Annan. The scheme which was started with 15 women with each contributing

one rupee a day has grown to a corpus of $180 million in a short time. In many case

the clients of MFIs have become computer literate and internet savvy. The have

come to accept technology for financial inclusion

4. Innovations in Microfinance

Democratisation and decentralisation in decision-making have given a boost

to local participation. Members are using the modern tools and techniques like

NGO, or local government organisation, though self-help groups or through

individuals, as locally appropriate (Hulme and Paul, 1996).

In India the self-help group (SHG) movement is seeking to provide social

intermediation through the Rashtriya Mahila Kosh (RMK) and Women’s

Development Corporations, howsoever small they are compared to the erstwhile

Integrated Rural Development Programme (IRDP). Using ‘trust’ as the base the

MFIs have been able to foster group cohesiveness through networking. The

benefits of networking also include low cost marketing, knowledge diffusion, easy

access to timely health care etc. Social intermediation through a range of activities

and capacity-building has enabled people to become good borrowers and savers,

better manage their own finances or their own financial groups and helped them to

put whatever ‘social capital’ they have to more productive use. No doubt such an

intervention is not likely to be financially self-sustainable. This gives a new

responsibility to the banker too (as in the case of SHG-Bank Linkages). But the

banker must accept that this is a role which the NGO, as a committed social

engineer, is better suited to execute. Social engineering is a full-time activity which

has no substitute for the limited community contacts that a committed banker might

indulge in. The Microfinancial Sector (Development and Regulation) Bill, 2007 with

all its legal aspects aims to ensure that NGOs use their social mediation skills to

ensure financial intermediation (Shylendra, 2007). What is needed, however, is to

explore the two-way relationship between financial intermediation and social

credit institutions to capacity-building and livelihood-sustaining associations of

people (Dinesha, 2008).

Client-specific and role-specific MFIs can do a lot in enabling people; reach

the realm of inclusive growth. Such tasks should be taken up with a knowledge that

social exclusion is something that cannot be solved through reservations, subsidies

and grants only. A balance between physical growth, social growth and cultural

growth should be maintained, always (Hans, 2009).

5. Conclusion

While MFIs continue to be the core institutions offering financial services to low

income populations, they have been proactive in the process of inclusive growth in

India by their innovative approaches. They have moved with the times. They are

changing for the better. By providing an array of financial and social services and

helping the members practise repayment ethics and social cohesion they can be

panacea for rural poverty and backwardness. They have immense potential not only

as a system of peer-to peer (p2p) lending but also as an avenue of social bonding

This is not to say that the MFIs have overcome all the social barriers (including that

of caste) in their intervention strategies. Their real success will depend on the

potential, reach and transparency, both from the financial side and from the social

side. Accessibility, accountability and sustainability in all their operations will help

the MFIs to lift themselves as social engineers, effectively. The country needs this

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