Microfinance: The poor as agents of change

Microfinance refers to microcredit, savings, insurance, money transfers, and other financial products targeted at poor and low-income people. Initially, it was gender neutral but quickly emerged as women-centric since it left a long-lasting, more profound impact on the lives of their families and communities. Women empowerment has led to the success of microfinance as a poverty alleviation tool. Moreover, microfinance helps reduce poor people’s need to rely on moneylenders who are widely regarded as exploiters with high interest rates ranging from 50% to 100% compared to Microfinance Institutions (MFI) which charge anywhere between 24% to 50%.

Methodology of Microfinance
MFIs have developed new methods over the last three decades to deliver very small loans to poor borrowers, taking little or no collateral. These methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly. Microfinance clients are usually self-employed, household-based entrepreneurs. Their diverse microenterprises include small retail shops, street vending, artisanal manufacture, and service provision. In rural areas, microentrepreneurs often have small income-generating activities such as food processing and trade; some but far from all are farmers.

SHG Model
The Self-Help Group (SHG) is the dominant microfinance methodology in India. The operations of 15-25 member SHGs are based on the principle of revolving the members’ own savings. External financial assistance – by MFIs or banks – augments the resources available to the group-operated revolving fund. Savings thus precede borrowing by the members. In many SHG programmes, the volume of individual borrowing is determined either by the volume of member savings or the savings of the group as a whole. Some NGOs operate microfinance programmes by organising federations of SHGs to act as the MFI which obtains external loan funds in bulk to be channelled to the members via the SHGs.
The National Bank for Agricultural and Rural Development (NABARD) has facilitated a programme that entails commercial banks lending directly to SHGs rather than via bulk loans to MFIs. NABARD re-finances the loans of the commercial banks to SHGs. Individual Banking Programmes (IBPs) entail the provision by MFIs of financial services to individual clients – though they may sometimes be organised into joint liability groups, credit and savings cooperatives or even SHGs. The model is increasingly popular for microfinance particularly through cooperatives. In the case of cooperatives, all borrowers are members of the organisation either directly or indirectly by being members of primary cooperatives or associations which are members of the apex society. Creditworthiness and loan security are a function of cooperative membership within which member savings and peer pressure are key factors.
Though the magnitude and timing of savings and loans are largely unrelated, a special effort is made to mobilise savings from members. There are now a large number of ‘new generation’ cooperative credit societies in Andhra Pradesh which was the first to enact a law permitting mutually-aided – as opposed to traditional government-assisted – cooperative societies. Elsewhere, a number of well known programmes such as the SEWA Bank in Ahmedabad, the Indian Cooperative Network for Women, Tamil Nadu and the Annapurna Mahila Cooperative Credit Society in Mumbai have still survived under the traditional cooperative laws.
Grameen Model
Grameen Model, pioneered by Bangladesh’s economics professor Muhammad Yunus, was initially promoted by the well known Grameen Bank of Bangladesh. Such microfinance institutions undertake individual lending but all borrowers are members of 5-member joint liability groups which, in turn, get together with 7-10 other such groups from the same village or neighbourhood to form a centre. Within each group and centre peer pressure is the key factor in ensuring repayment. Each borrower’s creditworthiness is determined by the overall creditworthiness of the group. The model has become popular with its inherent feature to keep the moneylenders at bay and help the poor have access to finance at reasonable interest rates.
In India microfinance movement began in 1973 with the formation of the Self Employed Women’s Association (SEWA) in Gujarat with a Mahila SEWA Cooperative Bank to access certain financial services. Almost 4,000 women contributed their share capital to form the bank. Today the number of the SEWA Bank’s active clients is more than 30,000.

Outreach and impact
This has led to record impressive figures of growth by the microfinance sector in India. At macro-level, poverty ratio in the country has been declining from 36% in 1993-94 to 27.5% in 2004-05. Though it is difficult to specify the contribution of microfinance in bridging the gap, the MFIs are no doubt, reaching out to millions and could even reach a billion in a couple of years from now.
As of March 2009, microfinance institutions have reported a total client base of 22.6 million. Together with SHGs, the net client base is estimated to be 70 million. And the outstanding loans of MFIs as of March 2009 was Rs. 117.34 billion and alongwith SHGs it stood at Rs. 241.96 billion. NABARD’s provisional data for 2008-09 shows that 1.71 million self-help groups had been financed and the disbursements to them reached a new high of Rs. 127 billion, up from Rs. 88 billion in the previous year, recording an increase of 43%. The number of SHG accounts reached 4.1 million during the period and the total number of members linked to the banking system through SHGs is estimated to be around 54 million.
From a handful of MFIs 30 years ago, India now has 788 MFIs reaching 234 of 331 districts in the country, according to a survey identified by the government for the purpose of NREGA or rural employment generation programme. With states like Meghalaya and Sikkim appearing on the radar of microfinance in 2008, Nagaland, Arunachal Pradesh and Mizoram are the only three states which have been left out of the ambit of microfinance in the country. The top five states in terms of client reach are Andhra Pradesh, Karnataka, West Bengal, Tamil Nadu and Orissa.
Microfinance is neither a miracle nor a solution but is certainly a means to tackle poverty. Coupled with other social programmes in a holistic approach, microfinance can fight poverty and turn the poor as agents of change. Poor people are very vulnerable and move from one crisis to another. Access to microfinance enables them to manage risk better and take advantage of opportunities. Microfinance leads to an increase in household income. The use of loans and deposit services can result in a diversification of income sources or enterprise growth.
In terms of empowerment of women, microfinance has enabled them money management, greater control over resources, and access to knowledge which has led to greater choices and a voice in family and community matters. Economic empowerment is accompanied by growth in self-esteem, self-confidence, and new opportunities. In 2002, 103 women clients from Activists for Social Alternatives (ASA) were elected to the local councils in India. Enterprise revenues rise as a result of microfinance services. Between 1997 and 1999, an overall increase in revenues was observed among all enterprises managed by households in India.
Microfinance has achieved its success and popularity through its recognition of the poor as agents of change. MFIs do not dole out aid but present the poor with opportunities to advance themselves. Any poverty alleviation strategy that aims for marked reform needs to realise that the poor know how to help themselves far better than aid agencies. Microfinance precisely gives this power to the people.

The writer is Executive Director, Microfinance Focus, a monthly digital magazine, considered to be the first and only international online monthly magazine focused on the microfinance sector. A certified Trainer of Microfinance, accredited by Asian Development Bank, he has also won the first “Solution Exchange (A wing of UN, India) – Microfinance Community Knowledge Promoter Award 2007 for Outstanding Community Support”.

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