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CHAPTER 3

REVIEW OF LITERATURE

3.1 Introduction

Microfinance is perceived as a tool of social change, poverty alleviation and risk

management. Microfinance projects are being promoted all over the world as a tool to

mitigate poverty, fight against financial exclusion and to empower poor, especially

women. Year 2005 was declared the Year of Microfinance for all organizations working

with the United Nations. In India, 64.5% of the households do not have access to formal

financial services (50% in urban and 69.5% in rural areas). There is a huge potential for

microfinance for MFIs and appetite for micro financial products by the poor in India,

where 27.5% of population lives below poverty line and is also financially excluded

(National Sample Survey, 2008). Micro financial services can be a possible solution to

alleviate poverty but due to lack of reliable studies on the impact of other comparable

policy measures, the state is hesitant to take it up vigorously as a measure to alleviate

poverty.

Robinson (2001) defines microfinance as,

Microfinance refers to small scale financial services for both credits and deposits –

that are provided to people who farm or fish or herd; operate small or micro

enterprises where goods are produced, recycled, repaired, or traded, provide

services; work for wages or commission; gain income from renting out small

amounts of land, vehicles, draft animals or machinery and tools; and to other

individuals and local groups in developing countries, in both rural and urban areas.

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The National Bank for Agriculture and Rural Development (NABARD, 1999) defines

microfinance as,

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

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

their income levels and improve their living standards.

Hinting at the shortage of capital as a major constraint for the poor Otero (1999) defines

microfinance as,

Microfinance creates access to productive capital, which together with two other

forms of capital, addressed through education and vocational training, and social

capital, built through creating representative, local organization building, promoting

democratic systems, and strengthening human rights; enables people to move out of

poverty. Microfinance enables poor self-employed people to create productive

capital, to protect the capital they have, to deal with risk, and to avoid the destruction

of capital. It attempts to build assets and create wealth among people who lack them.

For the very poor, microfinance becomes a liquidity tool that helps smoothen their

consumption pattern and to reduce their level of vulnerability.

Stressing on the unique methodology of credit delivery, The Consultative Group to Assist

the Poor (CGAP, 2003) defines microfinance as,

A credit methodology that employs effective collateral substitutes to deliver and

recover short-term, working capital loans to micro entrepreneurs.

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On the basis of these definitions, we can infer that microfinance has the following

important features:

1. Very small loans to very poor people in rural and urban areas.

2. Loans are given without any collateral.

3. Formation of borrowers groups such as Self Help groups.

4. Loans for income generating activities to mitigate poverty.

5. Encouraging thrift.

6. Privatization through mechanism of NGOs for disbursement of loans.

Self-Help Groups (SHGs) are often used as delivery channels for micro financial

services. An SHG is a group of about 10 to 20 persons from a homogenous background

who come together for addressing the common problems. They collect voluntary savings

on a regular basis and use the pooled resources to make small interest bearing loans to

their members (Rangarajan, 2006). These SHGs originated in Mysore Resettlement and

Development Authority (MYRADA) in 1984 and were called as Credit Management

Groups. When MYRADA entered into an agreement with NABARD in 1986-87 to take

up a pilot project to promote these groups, the name was changed to Self-Help Groups

(Fernandez, 2006). Some MFIs provide micro loans to smaller groups of five people

known as joint liability groups (JLGs).

In India, 26.1% of the population or 260.3 million people live below poverty line

(Economic Survey, 2005-06) having limited or no access to formal sources of finance, no

permanent shelter to live, absence of safety nets to protect the poor from shocks like

sickness, accidents, death or loss of assets due to natural calamities; the word micro

prefixed to credit, insurance or housing has special relevance. For conceptual clarity it

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will be pertinent to examine the terms microfinance, micro credit and micro insurance

and micro remittances in the beginning to analyze survey data related to these terms the

following chapters.

3.1.1 Micro Credit

Micro credit and microfinance are often used interchangeably but they are different with

respect to their scope. While micro credit means provision of small loans; microfinance

has a wider scope and connotes provision of credit, savings and insurance. Initially, the

term micro credit was coined by the Grameen Bank to provide small loans to the very

poor households but later the realization that households can benefit from other financial

services like micro insurance and micro savings along with micro loans that the term

microfinance gained currency.

It is often debated whether poor households need loans or other financial services. Some

argue that poor households living close to subsistence level hardly have anything to save.

They need loans and not saving facilities (Bhaduri, 1973). On the contrary, Adams and

Von Pischke (1992) argue that poor households can seldom use loans productively, so

they need saving facilities and not loans. According to them, it is due to lack of

opportunity and not due to inability that poor households cannot save. They further argue

that only ‘less poor’ should be the target of micro lending.

While micro credit provides poor households the means to earn their livelihood and

increase their income by taking up an economic activity, microfinance, which includes

provision of saving and insurance services, helps them hedge the risks arising due to

financial and natural shocks (Morduch; Armendariz, 2005).

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3.1.2 Micro Savings

Savings are an integral part of microfinance. To provide collateral free loans to the

financially excluded poor, compulsory savings, in a way, serve as collateral to provide

affordable credit. Savings also help the savers to meet their life cycle needs and lumpy

expenditures occurring in short, medium or long term (Morduch; Armendariz, 2005).

Inclusive growth requires that everyone should have access to the financial services in

the economy. People at the bottom of the pyramid find themselves caught in a vicious

circle of poverty which reinforces itself due to lack of access to various financial services

which can help them break this cycle. Despite mandatory requirement of priority sector

lending, the commercial banks in India, earlier kept the small savers away from opening

their savings accounts by keeping minimum balance requirements. Banks cited high

transaction costs for maintaining such accounts as the main reason. The public sector

banks, due to the patronage by the government and the capitalist class, hardly made any

efforts to innovate and develop suitable savings products for their poor clientele.

3.1.2.a SEWA Bank’s Initiative in Providing Micro Saving Services

SEWA Bank, in its attempt to assist the poor women in their struggle to live a dignified

life, realized this latent potential in their instinct to save. Savings help the poor build

capital for consumption, provide for emergencies and investment and serve as collateral

to seek loans from the formal sector (Harper, 2008). It instills financial discipline,

provides them confidence, security and dignity. They can reduce the wasteful

consumption thereby building capital assets to secure their future.

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SEWA Bank started their operations in an urban setting with hawkers, vegetable vendors,

the urban squatters and the daily wage earners as their clients to whom none of the

commercial entities provided banking services. In the absence of a mechanism to park

their small savings in a safe place which could be accessed at the time of need SEWA

Bank’s micro savings products worked as a boon to these poor people. It supports 1600

saving and credit groups with 38000 members in rural Gujarat. SHARE, another

Grameen type microfinance organization (MFO) in Andhra Pradesh also offers saving

services through a cooperative (Harper, 2008).

There is a potential to tap micro savings of the poor by the MFOs. Due to strict RBI

regulations, MFOs are not allowed to mobilize savings. Grameen type MFOs do not

place much emphasis on savings beyond the compulsory savings of the SHGs. Savings

deposits mobilized by the top MFOs amount to US$7.8 million. As of now the average

savings of just US $18 per client are well below the US$26 average of top 10 MFOs and

US $52 for mature Individual Banking Programmes (IBP) (Sinha; Sinha 2008).

3.1.2.b Microfinancial Products by Mann Deshi Mahila Sahakari Bank

In Satara district of Maharashtra, Mann Deshi Mahila Sahakari Bank (MDMSB) was

established by rural women after seeking a license from the RBI in 1997. In 2010-11, it

had a share capital of US $15,000 to assets worth US $562000 and 140360 clients. It

provides savings, loans, insurance and pension services to its women clients. The

cooperative bank provides door-to-door collection service for savings, individual loans

up to Rs15000 against collateral and group loans to SHGs, life insurance for clients

between the age 18 to 60 and pension services to clients between ages 18 to 55. Clients

are required to save on a weekly, monthly, quarterly or yearly schedule and when they

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reach the age of 58, they receive a monthly payment based on accumulated savings and

interest. They have a tie-up with the UTI Mutual Fund for this service.

3.1.3 Micro Insurance

The poor are the most vulnerable to idiosyncratic shocks caused by death, sickness,

accidents and systematic shocks such as earthquakes, floods and riots causing loss of life

and assets and need insurance for risk coverage (Brau, 2011). Micro savings, micro credit

and micro insurance have synergies (Ghate, 2007) as small savings act as a buffer for the

poor in lean period, when their income flow is thin or totally absent due to seasonality of

their occupations or at the time of unemployment. Micro Insurance products provided by

the micro finance organization (MFO) are mutually beneficial to each other. Micro

insurance hedge MFO’s risk in the instance of a contingency like death of their member.

Small contributions towards insurance premium help in building up a contingency fund

which can be used by the MFO to write off loans as well as protect their clients from

various shocks such as sickness, death, accident or loss of assets due to natural

calamities. It also protects the erosion of poor clients’ small savings. This ‘self-interest’

leads to the wellbeing of the MFO and the client as it provides necessary safeguards to

the former as well as the latter’s family (Harper, 2002). Just as there exists a large

demand for savings and credit it is believed that there exists a large demand for formal

insurance also (Churchill, 2002).

3.1.3.a Massive Unused Potential

A recent study published by the UNDP’s Asia Pacific Regional Centre in Colombo –

“Building Security for the Poor: Potential and the Prospects for Micro Insurance in

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India”, estimates the size of micro insurance market in India (Rajivan, 2008). The study

estimates the potential market for insurance products to be between Rs62,000 and

Rs84,000 million. Such a vast potential yet remains to be fully exploited. Out of this

potential, potential for life insurance is around Rs15,393 to Rs20,141 million while for

non-life insurance it ranges between Rs46,911 to Rs64,126.55 million (Rajivan, 2008). In

India, where 90 % of the population is excluded from insurance, insurance still remains a

‘to be sold’ rather than a ‘to be bought’ product. People at the bottom of the pyramid with

a daily earning of $1 or $2 a day do not access insurance as they find it unaffordable. In

fact these people need insurance the most to protect them from shocks. Micro insurance

sector needs to be made demand driven rather than supply driven as is its status now.

The constraints on the demand side need to be looked into to find solutions by innovating

various products suitable to the clients’ needs.

Since early nineties, there is an influx of new players in the private sector, providing

insurance services. These new entrants are required to do a certain proportion of their

business in the rural sector. Insurance Regulatory and Development Authority (IRDA,

2000) requires private insurance companies to issue 16 % of their total life insurance

policies to the rural sector within five years and should build up at least 5% of their

income from non-life insurance policies within three years. They find a good opportunity

of doing lucrative business in consultation with the MFIs, having their vast presence in

the rural areas. These entities such as SEWA in Gujarat, Yeshasvini and Karuna Trust in

Karnataka, have developed attractive micro insurance products that are suitable for the

MFI members.

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3.1.3.b The Government’s Initiative

In order to make insurance more affordable and to increase its outreach, the Insurance

Regulatory and Development Authority of India (IRDA) has set social and rural targets

for insurance companies. However, many insurance companies are concentrating on

achieving rural targets by providing insurance for farm equipment etc. The IRDA

regulations of 2005 have specifically addressed to the needs of the micro insurance sector

by providing for various distribution challenges and bridging the gap between companies

and clients. The NGOs and MFOs are finding these provisions highly favourable and

conducive to the expansion of their services. The proposed Micro Finance Bill 2007 also

includes various provisions for pension and insurance services which will give a boost to

this sector.

3.1.3.c Issues Related to Micro Insurance

The major areas demanding deeper study of the insurance sector are the demand and

supply situation, pricing of insurance products, product design, outreach, distribution,

procedures and regulation (Rajivan, 2008).

3.1.3.c (i) Pricing

Pricing of micro insurance products poses a major challenge to the micro insurance

service providers as the clients cite unaffordability as the major cause for not buying

insurance products. Soft funding to cover the startup costs and to provide full risk cover

may solve the problem. Despite insurance being a risky product, MFIs like SEWA,

Ujjivan, Dhan Foundation, Working Women’s Forum (WWF) and Basix etc. have

designed various affordable life and non-life insurance products in collaboration with

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public sector insurance providers such as the Life Insurance Corporation (LIC) and the

General Insurance Corporation (GIC) and Royal Sundaram Alliance (RSA) and the ICICI

Lombard in the private sector, to offer insurance products to their members.

SEWA Bank offers many affordable insurance products to its clients. Its insurance

schemes are linked to savings and the premium is paid annually. One of its schemes

offers a comprehensive coverage including death (up to age 58), loss of property or

equipment due to fire, theft, cyclone, earthquake etc. (up to age 70); health insurance and

maternity benefits for a fixed deposit of Rs500 which is going to be raised to Rs1,000

(Fisher; Sriram 2002). Ujjivan, a Bangalore based urban MFI, offers life insurance

coverage to its clients for an annual premium of Rs100, providing a woman and her

husband coverage of Rs50,000 (Krishnan, 2007).

WWF offers insurance in collaboration with the LIC and RSA at competitive market

rates. The scheme has an added built-in incentive that provides scholarship to maximum

two children for Rs1200 to pay school fees. Indian bank’s Microsate Branch also offers

similar scheme in the form of Janashree Bima Yojana (JBY) scheme, whereby a member

pays Rs100 as annual premium to get coverage of Rs20,000 in the event of death of an

SHG member. Sharda Women’s Association for Weaker Sections (SWAWS) in

Hyderabad offers insurance and pension schemes by tying up with the ICICI Lombard

Insurance Company to provide general insurance and with the Royal Sundaram to offer

accident insurance (Gupta et al., 2007).

In a mainly agricultural society, crop and cattle insurance are difficult to provide due the

problems related to adverse selection and problem of moral hazard. Death, old age,

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accidents, maternity and life threatening diseases cannot be faked but there can be

incidents of faking loss of cattle (Ghate, 2007). Due to these reasons insurance products

designed to provide coverage for crop and cattle carry a high price tag. SHEPHERD, a

livestock insurance company offered livestock insurance with a one-time premium

payment of 4% of the animal’s initial value to the animal owners. Due to high rate of

premium, the scheme became very unpopular and the number of policy holders declined

from 350 in 2001 to 134 in 2004 (Ghate 2007). Thus these studies show that insurance

products for the poor have to be appropriately priced to create demand for them.

3.1.3.c (ii) Design of Micro Insurance Products

The insurance sector has been designing products in the past only for the well-off without

realizing the potential lying in catering to those at the bottom of the pyramid. As a result,

the client base remained thin. This is reflected through very low insurance penetration

(ratio of total premium to GDP) and insurance density (ratio of total premium to

population) in India, which was US$64.4 and 5.10% respectively in 2010 (IRDA). To

cater to the needs of the poor clients, product innovation is required, whereby the

insurance companies offer unbundled services meeting their specific needs. This will

definitely increase the outreach of micro insurance. MFIs continue their quest for

designing appropriate products suitable for their clients with affordable price tags. The

product design involves actuarial services to work out premium calculation. Since poor

people are unable to pay premium regularly, flexibility in time and the premium amount

can help in expanding the outreach of insurance products.

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3.1.3.c (iii) Innovation

The procedures and distribution channels for spreading the outreach of insurance

products need innovations that can enhance the spread and viability of insurance

schemes. Regulation is the key to increase the accessibility. More than a prescriptive

approach it is the participatory approach which can bring in the desired results.

SEWA Bank provides a range of insurance products under various schemes that provide

cover from life insurance to comprehensive insurance coverage including natural and

accidental death, loss of property due to fire, theft, cyclone, earthquake, health insurance

and maternity benefits. A survey (Srinivas, 1997) data shows that most of the SEWA

Bank’s clients with insurance were from urban areas rather than rural areas. It has

designed its insurance products to address needs of its women clients by providing

coverage to ailments and diseases specific to women (Harper, 2002).

3.1.3.d Micro Insurance: International Experience

Internationally, in some Asian, African and Latin American countries, micro insurance

schemes are successfully providing risk coverage to the poor. In Uganda, the Foundation

for International Community Assistance (FINCA) provides micro insurance to its clients.

The scheme is running successfully in collaboration with the American Insurance Group

(AIG). In case of an accidental death of the client, FINCA pays about $700 to the

dependents of the client and their outstanding loan balance is also paid off (Cohen;

Sebstad, 2003). If death is not accidental, dependents get only $175 and the loan balance

is paid off. There are more such provisions in case of spouse’s or children’s death. In

return for the coverage they have to pay an extra one per cent on top of interest on their

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loans that is disbursed. FINCA is running this micro insurance scheme successfully and

profitably as the technical side of the insurance like calculating actuarial tables is done by

AIG staff on premium amount sharing basis.

3.1.3.e Extent of Micro Insurance in India

The sub-regional South Asian office of the Strategies and tools against Social Exclusion

and Poverty (STEP) programme of the International Labour Organisation (ILO) provides

statistical data and case studies on micro insurance products. They have prepared an

inventory of 83 life and non-life insurance products in 2003-04. It shows that 52 % of the

organizations are located in Andhra Pradesh, Tamil Nadu, and Karnataka. Fifty one per

cent organizations are already offering insurance schemes and nine were planning to start

operations in near future (ILO, 2005). One third of the organizations were engaged in

microfinance, 31 % are NGOs supporting development activities at the grassroots level,

23 % were community based organizations (CBOs) and 12 % health care providers.

In 2003-04, twenty nine per cent organizations were offering health insurance. The

number increased to 54, offering 61 schemes in 2006 (ILO, 2006). The total number of

individuals covered was 5.1 million. Thirty five of these schemes were under partner-

agent model, 25 of them consisted of in-house schemes. SEWA’s VimoSEWA is an in-

house model. It is a fixed deposit (FD) linked insurance scheme whereby the interest

earned on FD is paid as premium on insurance. Dhan foundation in Chennai, Tamil

Nadu, has successfully incorporated insurance into its MFI operations. In June 2004, 1.09

lakh Kalanjiam (SHG) members (including 0.24 lakh spouses) out of a total of 2.16 lakh

members of over 61 federations had volunteered to be covered by insurance. Insurance

density in India was 46 in 2007 with life risks enjoying a higher density than non-life

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risks. The LIC provides insurance coverage to 4.26 million policy holders under its Aam

Admi Bima Yojana (AABY). It has performed better than other insurance companies put

together. Non-life insurance products such as cattle insurance and assets insurance are

provided by the Agricultural Insurance Corporation of India (AICI), ICICI Lombard and

Iffco Tokyo Marine. United India Assurance Company (UIIC) reported that in 2008-09

their premium income from micro insurance policy was about Rs850 million, a 28%

increase in two years period from 2007 (Srinivias, 2009). The National Health Insurance

Scheme (RSBY) has covered 5.9 million BPL households. In Karnataka there is a self-

funded scheme, Yeshswini, which was started by the Cooperation Department of

Karnataka. In Maharashtra, ‘Uplift’ scheme has a mutual insurance scheme which is

entirely funded by the participants. For a premium of Rs10 per person, the scheme

provides a cover up of Rs15,000 per year. It covers 62,800 people through six NGOs and

MFIs as its partners. Drawing from a survey of seven locations in Tamil Nadu, Karnataka

and Maharashtra, David Dror (2006) of Micro Insurance Academy, concludes that

uniformly capped products are not useful for all in poor communities. The different

income levels among the poor call for different types and size of products. It was found

that the people were willing to pay between 1.12% and 2.64% of their income as health

cover premium. Their preference was for private health care than for public facilities.

A ‘Side-by-Side’ study of more than 83 MFIs carried out by Network of MFIs, Sa-Dhan,

in 2005, shows that life insurance rather than non-life insurance is a more popular

product offered by these MFIs. The impact evaluation study of 20 SIDBI Foundation for

Micro credit (SFMC) partners, ‘The Maturing of Indian Micro finance’ (EDA, 2005)

found that 14 of them offered an insurance product, 11 offered life insurance to 48% of

their members, eight of them offered asset insurance (such as cattle or a house) to 32 %

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members, who had acquired asset loans. Coverage of Grameen replicate MFIs is more

than double in providing insurance than SHG model.

MFIs have emerged as intermediary agents to carry the products of insurance companies

to their members. They act as a good agent to overcome information asymmetries and

reduce transaction costs. Through devices, such as deducting premium while disbursing

loans or from savings, adding a small amount of premium while paying loan instalment,

not only overcome market asymmetries but also overcome the problem of moral hazard.

Insurance companies are also coming up with unique tailor made products to cater to the

needs of MFIs. For example ICICI Prudential’s Salam Zindagi and Mitra policies, Tata

AIG’s Karuna Yojana life (natural and accidental death) insurance scheme provide

excellent coverage to the MFI members.

In spite of development of novel products by the insurers, from the perspective of MFI

members, the issue of information asymmetry remains unresolved. Often, the members

are not aware of the available products, their claim entitlement and are discouraged by

cumbersome documentation, especially when they are illiterate. In case of Sharan, an

urban MFI in Delhi, a female member gave up on her claim due to lengthy procedures

involved such as filling up forms, making many trips to the insurance provider’s office,

loss of money due to travel and absenteeism to attend to the paper work involved at the

insurer’s office (Titus 2008).

3.1.3.f Micro Insurance: The Government’s Role

The government too is playing its role by offering subsidies in the form of contributions

made to Social Security Fund administered by the LIC which enables it to pay half of the

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Rs200 premium for the Jan Shree Bima Yojana (JSBY). This scheme provides for

accidental death and disability and education grant for children in the ninth standard to

twelfth standard. The LIC is the biggest player in the life insurance field with 99.57%

share. In 2006 it launched its first micro insurance product ‘Jeevan Madhur’ and in 2009

it launched another term insurance plan, ‘Jeevan Mangal’, with refund of premium

facility. MFIs such as SEWA and Friend of Women’s World Banking (FWWB) proposed

at a national seminar held by IRDA in 2003 that a separate authority having

representations from non-government organisations (NGOs), community based

organisations (CBOs), SHGs, trade unions and cooperatives should be constituted for

micro insurance. Subsidies should be routed through this authority since it is in a better

position to judge the requirements of this sector. These MFIs however prefer government

to assist them in capacity building, product development, R & D and technical service

(like actuarial services) through a one-window mechanism than subsidies (Ghate, 2007).

3.1.3.g Micro Insurance: Some Lessons

It is a matter of time before the benefits of micro insurance sink in the minds of the poor

people. Once they witness the benefits accruing to their fellow members in the instance

of shocks like death or accident, they realize that it is worth paying a small amount as

premium without getting returns. MFIs, on the other hand, would like to scale up to reap

economies of scale. Their task can becomes easier if they introduce customer friendly

products in collaboration with insurance companies, such as pensions, periodic lump

sums, and maturity benefits after a fixed period. One of such products was LIC’s Krishi

Shramik Samajik Suraksha Yojana with a premium of Rs. 365 per annum or Re. 1 per

day for providing life and disability coverage and a lump sum survival or pension benefit

after the age of sixty (Ghate, 2007). The upshot is that MFI members will be happy to

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embrace those insurance schemes which provide them security against internal and

external shocks and maturity benefits so that they are assured that even if they do not

experience such shocks in their life time, their contributions are not going down the

drain.

3.1.4 Micro Remittances

If micro insurance is in nascent stage as a micro financial service, remittances or money

transfers are in their infancy. There is a vast potential that remains yet to be exploited in

case of remittances. In India there are a large number of migrants who cris-cross the

country in search of better job opportunities or better life, leaving their families behind in

their villages. They need to remit money to their families at regular intervals and are

looking for cheaper, reliable and faster means of transferring money to their native place.

Traditional methods such as Money Orders (MOs) are used for money transfers, which

are quite expensive and slow and are not of much help when the family needs money to

meet contingencies. Post offices charge 5% for a MO which means losing a day’s wages

every month to transfer money (Ghate, 2007). Another cheaper way is bank drafts, but

many of these migrants do not have a bank account. Still another way is to send money

through somebody known from the same village but it may require waiting and loss of

money due to theft of robbery while traveling. The fourth option is informal money

transfer, which is cheaper and faster but it needs to grow.

3.1.4.a Massive Potential for Cheap Remittance Services

Adhikar, a Bhubhaneswar based MFI has used this opportunity and provides money-

transfer service to 10,000 migrants from Orissa working in Gujarat and other parts of the

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country in Special Economic Zones (SEZs). In three districts of Orissa, Adhikar enrolled

about 70,000 members, in Surat it had about 913 members and in Gandhidham, 220

members, in June 2006. There are over 5 lakh Oriya migrants in Surat and monthly

remittances to Orissa by all the channels range between Rs10 crores to Rs50 crores.

There are around 30 to 40 money transfer operators who charge 4% for an amount below

Rs5000 and the charges go on decreasing as remittance amount increases. They fax

remittance details to their partners in Orissa who delivers money at the door step and

faxes back signed receipt within 24 hours (www.adhikarindia.org).

Adhikar charges three per cent for an amount up to Rs10,000 and 2.5% thereafter.

Service is available for three days a week. Its service is cheaper than other money

transfer operators but takes longer time to complete the transaction. Adhikar incurs 60%

of total cost on collection and 40% on distribution Ghate, 2007). Like Adhikar, other

MFIs can also provide remittance services, provided they have enough number of clients

in different cities/states. Though, to provide this service, their costs can be higher than

the banks as banks have economies of scale, there is still a good business opportunity

lying for them. Many banks have already adopted a Bank Correspondent (BC) model to

provide similar service. Adhikar also provides bank correspondent services to the ICICI

bank.

MFIs face competition in this field from private money transfer operators. There is not

much evidence of a fraud as these operators want to build on their reputation as reliable

money transfer organizations (MTOs). It is needless to say that an MFI like Adhikar has

an edge over other MTOs as it offers loans and insurance to its members. MFIs especially

in urban areas have a significant scope in money transfer services if they can identify

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major corridors of inter-state migration. Many MFIs which do not have presence in

originating and destination place of migrants, can have tie ups with other MFIs or banks,

to carry on their business.

Many MFIs are extending their operations in different states and can add remittance

service to their portfolios. For example, Rashtriya Grameen Vikas Nidhi (RGVN) in

Assam is planning to introduce remittance service to 35,000 of its credit and savings

programme clients spread to 10 districts of the state, using telephone or e-mail transfer

money at a proposed fee of 1.5% (Ghate, 2007). Spandan Spoorthy, one of the largest

MFIs in India, has tied up with the Western Money Transfer Ltd., to offer remittance

services to its clients.

This new area needs regulation and the Micro finance Act should have a provision for it.

In case of loans, it is the MFI which bears the risk, whereas in case of remittance it is the

client who is taking the risk. But since the MFI members are also borrowers and their

borrowed amount exceeds the remittance amount, the risk is shifted to the MFI. The

proposed Microfinance Bill can provide adequately to encourage the spread of this

service.

Having defined the term microfinance and its connotations, it will be pertinent to

critically review the existing literature on the impact of microfinance on poverty,

development and empowerment of women to place the present study and its findings in

its proper perspective.

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3.2 Microfinance and its Impact on Poverty

Various empirical studies have established positive or no effect of microfinance on

poverty eradication. Hossain (1988) alleges that the Grameen Bank members had

incomes about 43% higher than the target group in the control group villages and about

28% higher than the target group non-participants in the project villages.

Bolnick and Nelson (1990) found out that microfinance participation had a positive

impact on small enterprises which were labour intensive and growing but it was not

uniform across sectors and target variables. Kamal (1996) noted higher rates of per capita

income among micro credit programme borrowers as compared to those who did not

borrow.

One of the most widely cited early impact studies by Hulme and Mosley (1996) indicates

positive impact of microfinance on incomes of the poor (1988-92) with an average

increase of 10-12% of borrowers in Indonesia and around 30% in Bangladesh and India

over the control group. However, a study by MkNelly et al. (1999) and Coleman (1999)

on village banking, providing microfinance in Thailand, report that there is no evidence

of an impact on income and assets of members or the loans being used for productive

purposes.

While studying the impact of microfinance on Grameen beneficiaries in Bangladesh, Pitt

and Khandker (1998) point out that microfinance programmes have a significant impact

on the well-being of poor households and this impact is greater when credit is targeted to

women. He estimates that for every 100 taka lent to a woman, household consumption

increases by 18 taka. Moderate poverty falls by around 15% and ultra-poverty by 25%

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for households who have been BRAC members for up to three years. However, Morduch

(1998) has criticized Khandker’s study stating that there are flaws in the data set,

particularly in relation to the representative nature of the control group. He also found

that MFI programmes have a positive impact on household income, production and

employment on participants especially in rural non-farm sector.

Khandker (1998) summarises a number of studies conducted by Bangladesh Institute of

Development Studies (BIDS) and the World Bank in Bangladesh, using 1991-92 survey

data. He draws a number of conclusions, one of which is that, there is positive impact on

household consumption of especially, female borrowers. Following up with this study,

khandker (2003) finds that there is strong evidence of poverty reduction of microfinance

programme participants. He estimated that due to participation in microfinance

programmes, moderate poverty among programme participants decreased by 8.5 per cent

points over the period of seven years and extreme poverty dropped about 18 points over

the same period.

While some proponents of the new wave microfinance recognize that the poorest people

often do not benefit directly from microfinance, they believe that focusing on the slightly

better off is a more effective development strategy and the growth of small enterprises

will increase employment opportunities for the poorest (Malhotra, 1992 cited in Ghate et

al, 1996). There is, however, little evidence that benefits trickle down in this manner. A

recent review of micro enterprises development programmes in seven countries found

that entrepreneurs very rarely hired non-family labour (Hulme and Mosley, 1996).

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A study of 13 MFIs by Mosley and Hulme (1998) in seven countries (Bolivia, Indonesia,

Bangladesh, Sri Lanka, Kenya, India and Malawi) has constructed an “impact frontier”

which describes inverse relationship between outreach and impact. Hulme and Mosley

(1998) suggest that providing credit for micro enterprises is unlikely to help the poorest

people to increase their incomes. However, detailed research with users has found that

some design features of savings and credit schemes are able to meet the needs of very

poor people. For example it was found that easy access to savings and the provision of

emergency loans by SANASA enabled people to cope better with seasonal income

fluctuations (Montgomery, 1996).

Wydick (1999a) finds that access to credit in Guatemala increased upward class structure

mobility significantly. Using same data set his study (2002) finds that access to credit

leads to job creation initially but it is followed by prolonged periods of stagnant job

creation. Wydick (1999b) constructs a theoretical model to analyse the economic trade-

off between future returns to schooling and current returns to child labour in Guatemalan

household enterprises. He states that in some states, micro credit increases the probability

of children attending schools; however, during certain states of moral hazard the cost of

schooling may outweigh the benefits of child labour.

Microfinance clients appreciate access to micro savings. Low income households often

worry about going into debt and micro savings can be turned into ‘lumps’ of money that

can be spent on major purchases or events (Rutherford, 2000).

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Mosley’s study (2001) in Bolivia shows that assets and income increased commensurate

with initial levels of poverty, but over-leveraging may lead to vulnerability of

microfinance borrowers.

Copestake et al. (2001) point out that borrowers who were able to raise two loans,

experienced high growth in profits and household income as compared to a control

sample, but borrowers who never qualified for a second loan were actually worse off due

to MFI collection mechanism.

Kevane and Wydick’s study (2001) finds out that targeting micro enterprise credit to

poor women implies a trade-off between economic growth in favour of poverty reduction

and child welfare. Female entrepreneurs of child bearing age create significantly fewer

jobs than male entrepreneurs. Most of these studies provide evidence of positive impact

of microfinance.

Dunn (2001) finds out that enterprises of MFI participants performed better than non-

participants. Mosley’s study (2001) in Bolivia shows that assets and income increased

commensurate with initial levels of poverty, but over-leveraging may lead to

vulnerability of microfinance borrowers.

Anderson (2002) studied 147 MFIs and found that participation in MFI programmes

increased awareness and common pool resource stewardship.

Woller and Parson (2002) estimated that a microfinance programme in Portoviejo,

Ecuador contributes $480000 per annum in direct and induced economic benefits to the

local economy.

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Impact studies on microfinance in Bolivia (Mosely, 2001), China (Park and Ren, 2001),

Ecuador (Waller; Parson, 2002), Gautemala (Kevane and Wydick, 2001), Indonesia

(Nelson, 1990), Robinson (2000), Thailand (Coleman, 1999), Uganda (Barnesw et al.

(1999) and Zambia (Copestake et al. 2001) and by Mosley and Hulme (1998) Anderson

et al. (2002) show that impacts are highly contextually specific.

Dunn and Arbuckle (2001) report positive poverty reduction impact of microfinance.

Chen and Snodgrass (2001) while studying the impact of micro financial operations of

Self Employed Women’s Association (SEWA) in Ahmedabad, India, report that there

was significant movement in above and below poverty line clients. However, Meyer

(2002), argues that in the absence of evidence on counterfactual there is no strong

evidence of poverty reduction impact of SEWA Bank’s operations.

Banegas et al. (2002) found in Bolivia that the better off amongst the poor are benefitting

more from microfinance.

Burgess and Pande (2003) also remark that branch expansion programme between 1961

and 2000 lead to reduction in poverty through supporting activities of trade and services

in the informal sector. Microfinance can lap up these opportunities in urban areas and can

have impact on urban poverty.

Pitt et al. (2003) find that there is significant positive impact in two out of three health

measures for children of female borrowers. Male borrowing had no such impact.

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Dr. Yunus (2003) too emphasizes that micro credit is not a miracle cure to alleviate

poverty.

More positive conclusions in terms of the ability of microfinance to reduce vulnerability

are found in Indonesia by Gertler et al. (2003), who find that access to microfinance

helps poor households smooth consumption in the face of decline in the health of adult

family members.

While conducting a study in Bangladesh to examine the impact of microfinance on

poverty, Rehman (1986) states that around 40% of the clients of MFIs are non-poor.

NGO-MFIs are dominated by such clients who take away major chunk of loans for

themselves. Often loans are taken for productive purpose but are used for consumption

purpose or to pay educational expenses or for sickness or house repair. This reduces the

pace of poverty reduction. Rehman (2010) points out that in Bangladesh there is no

clarity about deposit taking for NGO-MFIs. These institutions hesitate to give loans on a

long term basis as a result of which poor people cannot borrow adequate amount to start a

productive activity.

There are hardly any differentiated loan products for different clients to cater to their

needs. There is no customer orientation to explain them about various loan products.

Loan rescheduling and withdrawal of personal savings is not allowed. Agreed loans are

not fully disbursed. A part of the loan is kept as savings deposit with the NGO-MFI,

which can be viewed as collateral against any default. There is no reduction in the rate of

interest on prepayment of loan. Lending and interest calculating procedures are

complicated and confusing not only to a poor illiterate but also an educated individual.

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Microfinance products such as micro insurance are not popular with the clients. There is

multiple borrowing by clients leading to indebtedness. In Bangladesh, the average

overlap rate is 33% (PKSF, 2004). There are instances where there is unauthorised use of

clients’ savings to recover loans (Rehman, 2010).

In spite of a good network of NGO-MFIs in Bangladesh, people still borrow from money

lenders (Chowdhry, 2004). There is dearth of talented workforce in microfinance sector

as workers are poorly paid. There is a huge gap between the salary of staff and the CEOs.

Governance of these NGO-MFIs is abysmally weak (Rehman, 2010).

Arun et al. (2006) find that microfinance by MFIs plays an important role in poverty

reduction. In rural areas, households that are accessing loans for productive purposes are

able to come out of poverty. In urban areas, however, microfinance helps in reducing

poverty of households that are accessing loans for productive purpose or even for

consumption smoothing.

Referring to a study conducted by Mahila Abhivruddhi Society Andhra Pradesh

(APMAS) (Mahajan and Ramola, 2003), Shylendra (2006) points out that a significant

proportion of SHGs are of poor quality which may have a bearing on their ability to

access savings and credit on a sustainable basis. The APMAS study found out that 40%

of the SHGs were of poor quality to access bank linkage.

The gist of Bangladesh’s microfinance industry as reported by Rehman’s study (2010) is

that it has failed to achieve the objective of alleviation of poverty as micro loans are not

sufficient to start sustainable micro enterprises. A fair amount of microfinance industry

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does not generate any income and hence poverty fighting power of microfinance is

limited. If microfinance has to work as a tool to alleviate poverty, these problem areas

need to be worked upon.

Small Industries Development Bank of India (SIDBI) commissioned a comprehensive

study of 25 MFIs from all over the country to study the impact of microfinance in 2001.

In the first stage, a baseline survey (BSL) of some 20 MFIs was conducted in 2004-05. A

large sample of 5327 households (3908 clients and 1419 non clients) was taken for

impact study. In the second stage, BSL was completed in four phases in 2007. The study

shows that overall 80% of the clients are females. In case of group based MFIs 96%, in

case of Grameen type MFIs 98% and in case of individual banking 30% clients are

females. There is highest representation (45%) of backward classes in the sample taken

for study. The outcome is much desirable i.e. micro credit has made a perceptible impact

on the lives of poor client households. There is increase in asset acquisition of very poor

from 32.3% to 40%. Productive assets increased from 37% in baseline to 47.0% in end-

line. Sixty seven per cent clients had multiple source of income. Percentage of household

borrowing from the money lenders came down from 7.96% to 5.04% and from friends, it

came down from 5.32 5 to 2.61%.

SIDBI study resorted to wealth ranking in very poor, poor, border line and self-sufficient

categories. An index based ranking was designed for this purpose. The study shows that

half of the very poor moved to the category of poor, 17% still remained in the same

category in the end line and 40% remained in the same category in case of poor. About

10% of them moved down to very poor category. Perhaps only provision of credit is not

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sufficient to pull the households out of poverty: they need credit plus services to cross the

poverty line on a long term basis.

The SHG-Bank Linkage project initiated by NABARD has good impact on various

economic variables viz. employment, income, interest rates, savings and poverty

alleviation. A study conducted by V. Puhazendi and K. C. Badatya (2002) in

Chhattisgarh, Jharkhand and Orissa points at reduction in poverty ratios. They found that

in pre-SHG situation 87.8% members were below poverty line while in post-SHG

situation 74.8% members were below poverty line. NABARD’s interventions lead to

increase in employment especially in non-farm activities (NABARD, 2005-06).

Swain (2011) points out that SHG membership has a positive impact on asset

accumulation (a long term impact) but has potentially negative effect on current income

generation. Analyzing the Compound Annual Growth Rate (CAGR) technique used by

NCAER for pre-post evaluation, she finds out that this method is imprecise for impact

studies. She argues that methodology based on recall data with lack of a proper control

group can lead to misleading impact measurement with CAGR. Her study shows that

using different data on SHGs to calculate CAGR can be improved further if calculations

are even made for control groups such as new SHG members and non-members. The

pipeline methodology implemented on the evaluations can show better impact results.

Hulme and Arun (2011) have refuted the common belief that microfinance reaches

‘poorest of the poor’ and that all loans are taken for investment in micro enterprises.

Recent studies in India indicate that loans taken for productive purposes were more

important for poverty reduction in rural areas than in urban areas. Simple access to loans

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from MFIs has greater poverty reducing effects than access to loans from MFIs for

productive purposes.

Hulme (2011) considers that in many countries, including India, banking regulations

need amendment so that well managed MFIs can offer saving services to poor

households. Many studies show that financially excluded poor households value access to

secure savings as much as access to loans (Hulme and Mosley, 1996; Collins, Morduch,

Ruthven and Rutherford, 2009). Unfortunately the governments are not treating

microfinance regulation as a priority as e. g. in India, the Microfinance Institutions

(Regulation and Development Bill) was presented in the Parliament in 2007, has been

approved by the Union Cabinet but it is yet to be passed in the Parliament. In the new

draft of the Microfinance Bill, the RBI has been assigned the role of the primary

authority to oversee the sector and discourage state level legislation. But there is huge

support towards state level legislation, especially in Andhra Pradesh, due to unethical

practices of some of the MFIs. Sadly, the Bill does not capture the Malegam Committee

report recommendations for an efficient microfinance sector (Hulme; Arun, 2011).

3.2.1 Microfinance Initiatives by the Government of India for Poverty Alleviation

Governments in many developing countries are also providing microfinance using SHGs

as a channel for their poverty alleviation programmes. In India the government

introduced two mega poverty alleviation programmes SGSY and SJSRY to alleviate rural

and urban poverty respectively.

Kudumbashree is a Kerala state government’s initiative to alleviate urban poverty with

microfinance channelled through SHGs; neighbourhood groups (NHGs) and community

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development societies (CDS). Various studies have been conducted from time to time to

study the multi-faceted impact of the programme. The most comprehensive study on

Kudumbashree by Oommen (1999), finds that about 51% of the households investigated,

became non-poor due to the programme; there is improvement in housing and awareness

of various communicable and non-communicable diseases. The loan repayment rate is

high; more than 56% of NHG households have improved their economic status. More

than 90% of women believed that collective action against injustice towards women is

inevitable.

Appadurai (2001) studied the working of Mahila Milan in Mumbai, which grew out of

the struggles of pavement dwellers in 1985 to construct sanitation facilities. Members of

the Mahila Milan save money on a daily basis and the members can borrow from the

pooled savings. They use their collective savings as a tool for collective bargaining from

the formal banking institutions, donors and city authorities for their basic infrastructure

needs.

A study by Singh et al. (2002) in north Indian city of Amritsar points out poor

implementation of SJSRY scheme. They observed that the scheme has been implemented

by the Amritsar Municipal Corporation in a haphazard manner. It is mandatory to carry

out a survey to identify BPL households prior to the implementation of the scheme. No

such thing was done by the urban local body (ULB henceforth). After obtaining funds for

the scheme, the ULB assigned the task of BPL survey to a private agency at a whopping

cost of Rs85 million. Thus money meant for various self-employment generating

schemes under SJSRY, was spent otherwise. Further, implementation of the scheme

requires a hierarchical creation of CDS, NHGs and RCVs which has not been followed.

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In the absence of a prior BPL survey, the study found that the beneficiaries of the scheme

were non-poor. Their study shows that the scheme meant for the urban poor has not

helped them in becoming self-reliant and is an utter failure due to clumsy

implementation.

These studies point out that micro financial initiative by the government bodies in the

form of schemes such as SGSY and SJSRY can succeed only if they are implemented in

the true spirit. Poor conception, implementation and supervision with hardly any quality

checks set in place, hamper the success of the scheme and achievement of objectives.

A study by Basu et al. (2005) on SHG-Bank Linkage Programme (SBLP) in India holds

that microfinance has a positive impact on income, employment, consumption

expenditure, and poverty reduction. There is positive social impact in the form of SHG

women meeting bank officials. She believes that SBLP is most suited to India as it

capitalises on the country’s vast network of rural banks.

While studying the impact of Maharashtra Rural Credit Project (MRCP) in a village in

Pune district (Maharashtra), Gaiha (2005) shows that majority of the beneficiaries of the

project were non-poor than poor. The exclusion of the poorest was partly due to their lack

of awareness and partly due to their social isolation, resistance of the upper class to

include them in the SHGs. It was not just their selection but also the benefits depended

upon whether the borrowers belonged to the poor or the affluent class. In another study in

selected villages in Pune city Gaiha and Nandhi (2007) found positive impact of

microfinance on savings and various dimensions of women’s empowerment.

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Beneficiaries reported lesser domestic violence, however, greater responsibilities for

women borrowers due to increased hours of work.

While examining the effectiveness of poverty alleviation schemes initiated by the Indian

government from time to time, Sarma (2006) found that funds earmarked for the

implementation of SJSRY were not utilised fully. The states utilised only 63.5% of the

funds made available. Few states such as Andhra Pradesh, Gujarat and Madhya Pradesh

performed reasonably well while in Assam, Karnataka and Bihar results are not very

encouraging. Field studies on the implementation of SJSRY indicate that the performance

of the Community Development Societies (CDS) in a number of cities/towns fell short of

expectations. The CDS in some cases were emerging as alternative centre of political

authority – a counter to the elected municipal council in a number of cities/towns. The

study recommends that three tier structure of SJSRY i.e. CDS, neighbourhood groups

(NHGs henceforth) and regional community volunteers (RCVs) is necessary for success

of the scheme.

Poonacha (2008) investigated the SGSY programme and the challenges faced by the

Mahila Arthik Vikas Mahamandal (MAVIM), an NGO promoting and supporting SHGs,

in a village in Thane district of Maharashtra. She found that in spite of poor

implementation of the SGSY and the resulting insignificant effect on reducing poverty,

the NGO MAVIM has played a significant role in women’s empowerment by increasing

their awareness level so that they are not exploited by unscrupulous agents in society.

Krishnan (2009) from Banker’s Institute of Rural Development (BIRD) conducted a

study on Kerala Development Society’s Kudumbashree programme, which aims at

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alleviating poverty and empowerment of women through convergence of resources and

community action. Kudumbashree programme is based on a three tier community based

organisation (CBO) structure involving neighbourhood groups (NHG), area development

societies (ADS) and community development societies (CDS). The programme was

launched in 1998 but its effective implementation took place on early 2002. The

programme encourages habit of thrift among poor women, which can be lent out to

members to meet contingency expenditure arising out of shocks such as sickness,

accidents or death. Shreyas is an NGO, promoting SHGs for implementing poverty

alleviation programmes in Kerala. The study found that SHGs and NHGs have beneficial

impact on women’s empowerment. He points out that Kudumbashree and Shreyas should

work on invoking the spirit of enterprise among their members through training and

capacity building rather than only concentrating on thrift and internal loans.

A study by Gosh et al. (2010) has similar findings in context of impact of microfinance

on poverty. They believe that group participation has helped in removing poverty,

improved consumption level of the families of group members, improved rate of asset

creation of the families and improvement in women’s empowerment.

Their study contains two rounds of primary surveys, one carried out during 2005-06 and

the other during 2009-10 on the same set of SHG members from North 24 Parganas,

West Bengal, India. The SHGs were formed under SGSY scheme. Their study shows that

a large number of groups created under SGSY do not have a long existence which

reinforces similar findings by Srinivasan (2009). He found out that around 3.13 million

groups were created under SGSY programme up to October 2008 across different states

of India, however only 21% of the total number of groups took up economic activities.

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Findings of a study on SGSY, the poverty alleviation scheme of the government in

Jaunpur district of Utter Pradesh by IGIDR researchers, Pathak and Pant (2008), indicates

that there is no significant difference in income of the beneficiaries of this scheme. Due

to corrupt officials implementing SGSY, beneficiaries selected for the scheme were from

erroneous list. They were encouraged to go for individual works which is against the

spirit of the scheme. It may be because they wanted to show positive results of the

programme or they may be getting bribe for it or the BPL beneficiaries surreptitiously

entered the list to get advantage of the programme. Their study shows that there was

some positive impact on non-income indicators such as access to safe drinking water,

sanitation facility, electricity and improved housing conditions.

A recent study on Karnataka Urban Infrastructure Development Programme (KUIDP) by

Shashikala Sitaram (2007) on urban SHGs documents positive impact of microfinance

activities of SHGs. Her findings indicate that SHG savings and loan activity has led to

positive impact on income, consumption, savings, development of entrepreneurial skills,

increased awareness, mobility, decision making, and social security cover of SHG

women.

3.3 Microfinance and Impact on Empowerment

The concept of empowerment is topical and has undergone a perceptible change through

time period. Though the term is used often in development work, but has not been

defined in exact terms. The concept varies in meaning due to its use in different contexts

from sociology, education and politics to community development organisations and

international development organisations. Now-a-days it has become an elusive concept

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that escapes any attempt to define and measure it objectively (Carr et. al 1996, Brohman,

1996 and Panda 2000).

In India, the National Policy for Empowerment of women was adopted in the country in

2001 with the ultimate objective of ensuring women their rightful place in the society by

empowering them as agents of socio-economic change and development (Krishnan,

2009).

Attempts at conceptualisation of empowerment can be found in a myriad of literature

containing significant contributions by Sen (1981), Overholt et al (1985), Korten (1986),

Bhatt (1989), Peggy (1989), Edna and Bose (1990), Keller and Mbewe, (1991), Calman

(1992), UNICEF (1993), Schuler (1993), Helen (1993), Samar Singhe (1993), Schuler

and Hashemi (1993), Batliwala (1994), Mehmud and Johnsten (1994), UNDP (1995),

Holcombe (1995), Karl (1995), Carr et al (1996), Rao (1996), Conger and Kanungo

(1998), Batelle (1999), Kabeer (2000) and Panda (2000).

Authors such as Hashemi et al. (1996); Goetz and Gupta (1994), Hashemi and Riley

(1996), Schular et al. (1997; 98), Steel et al. (2001) have attempted to study impact of

microfinance on women’s empowerment in Bangladesh. All but one study have found

that microfinance programme participation exerts a statistically significant impact on one

or more aspects of female empowerment, such as use of contraceptives and intra-

household decision making. The only study by Goetz and Gupta (1994) shows that when

the loans are controlled by male relatives, women’s ability to take decisions on

investments get limited.

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In the nineties, women’s empowerment became a goal of many development projects

(Karl, 1995). Montgomery et al. (1996) have highlighted the gender relations through

their study within the literature on Bangladesh. Their findings show that out of the first-

time female borrowers, only 9% women were primary managers of their loan funded

activity while 87% played the role of ‘family partnership’. On the other hand, out of the

first-time male borrowers, 33% had sole authority over the loan-funded activity while

56% described it as a family partnership. Their findings show that access to loans by

female borrowers did little to their management of cash within the household.

Pitt and Khandker (1995) have attempted to expose the impact of male and female

membership of credit programmes on decision making. They have included value of

women’s non-land assets, number of working hours per month, cash income, fertility

rate, education of children for income and expenditure in their study and have concluded

that households receiving loans are better off than those not receiving any loans.

A study by Hashemi et al. (1996) have explored the impact of credit on a number of

empowerment indicators such as magnitude of women’s economic contribution, their

mobility in public domain, ability to make small and large purchases, ownership of

productive assets, involvement in major decision making such as purchase of land,

livestock for income earning purpose, freedom from family domination including

freedom to make choices, political awareness and a composite of all these indicators.

They found out that women’s access to credit was a significant determination of the

magnitude of economic contributions reported by women.

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Amin et al. (1998) using quantitative and qualitative evidence in Bangladesh show that

participation in microfinance programmes among other factors is positively related to

women’s empowerment.

Cheston and Kuhn (2002) point out that the ability of a woman to be empowered through

access to financial services depends upon many factors-some linked to her individual

situation and abilities and others depend upon her environment and the status of women

as a group. Control of capital is only one dimension of the complex and ever-changing

process by which the cycles of poverty and powerlessness replicate them. They argue that

increased self-confidence does not automatically lead to empowerment; it may contribute

decisively to a woman’s ability and willingness to challenge the social injustices and

discriminatory systems that they face. As women become financially better off, their

confidence and bargaining power within the household improves which indirectly leads

to their empowerment.

Mallick (2002) avers that microfinance services can result in gender conflicts in

Bangladesh. But Hossain (2002), rebutting Mallick’s argument, says that Mallick’s

assertions are immature.

While analyzing micro enterprise development programme for poor US women, Ehlers

and Main (1998) found that micro assistance is more detrimental than it is believed. They

argue that few women “graduate’ their business into formal sector due to gender

constraints and inappropriate microfinance training.

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Patel (2002) maintains that women’s development can be attained by improving her

status and bargaining power in the economy. Gender budgeting can bring out the nature,

character and content of share of development cake for them.

Pradhan (2003) observes that the issue of women’s empowerment comes from the need

to enable women to overcome subordination of men in the society. He believes that

empowerment is a process whereby the powerless gain controls over circumstances of

their lives and resources such as physical, intellectual and financial. Empowerment also

brings about a change in the ideology where it is felt that the traditional ideology is

hindering access to resources by women.

Holvoet (2005) finds that in a direct bank-borrower minimal credit, women do not gain

much in terms of decision making power within the household. However, when the loans

are channelled through women’s groups and are combined with more investment in

social intermediation, substantial shift in decision making patterns is observed.

In the days of international women’s decade ‘status of women’ was used as a yardstick to

describe empowerment i.e. the extent to which women are allowed to take decision in the

family and community shows empowerment (Muraleedharan, 2009). Then autonomy

became better way of portraying women’s empowerment than the ‘status of women’.

Throughout all this transformation of the concept of empowerment, socio-economic

indicators remained the measuring scale.

The Massachusetts Institute of Technology (MIT) study by Banerjee, Duflo, Glennerster

and Kinnan (2009) in slum areas of Hyderabad, India; found no impact of microfinance

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on measures of health, education or women’s decision making among the slum dwellers

of Hyderabad, India.

While reviewing the literature on impact of microfinance on women’s empowerment,

Kabeer (2009), has commented on positive and negative studies by her contemporaries

and her predecessors. She has referred to one negative study by Goetz and Sen Gupta

(1994), who have used a five point index of ‘managerial control’ over loans as an

indicator of empowerment. At one end of the index they have taken women having ‘no

control’ over their loans as these women had no knowledge about how their loans were

used and on the other end of the index they have taken women who have ‘full control’

over loans and participated in all productive activity, including marketing of products

funded by loan. Their study found out that women, especially who were married, had no

control over loans acquired by them. They suggested that facilities to enhance market

access for women loanees are the only way to enhance their control over loans. They also

suggested provision of transportation to take women to the market place to protect them

from any resistance by their spouses.

Ackerly’s study (1995) takes into consideration ‘accounting knowledge’ as an indicator

of women’s empowerment. Women who were able to report input costs of their loan

funded enterprise or profitability from an enterprise, were considered to be empowered.

She maintains that access to market is the primary route to women’s empowerment. She

found that membership of some credit organisations is more likely to contribute to

women’s empowerment by this criterion. On the flip side she has also cautioned against

the likelihood of overwork, fatigue and malnutrition of women who obtain market access.

Thus she claims that women, often have to pay a price for market access and their

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empowerment, as women are expected to play the traditional role of a homemaker as

well as take up additional role of a breadwinner for the family.

Kabeer (2000) has also referred to positive empowerment impact studies of microfinance

in her analysis. She refers to Rehman’s study (1986) which states that loanee households

in general enjoyed higher income and consumption standard than no-loanee households.

Sinha (2010) points out that microfinance does not attract only the poor. He states that

women’s empowerment manifested through their taking initiative to start a home run

enterprise participating in village Panchayat system reflects improvement in their status

but these impacts are not long lasting and significant. But such things happening even at

a small scale in a patriarchal society shows that a beginning has been made.

3.4 Microfinance and Impact on Income and Saving

White (1991), Kabeer and Murthy (1996) uphold that, “opportunities to save can also

play an important role in helping women build up assets they control, in addition to their

importance in poverty reduction more generally, reinforcing the case that they should be

an important element of any microfinance programme”.

Otero and Rhyne (1994) maintain that there is considerable evidence that poor people

greatly value flexible saving services, where they can save unrestricted and often, very

small amounts at convenient intervals and which they can access rapidly.

David Hulme and Paul Mosley (1996) found that poor households do not benefit from

microfinance. It is only the non-poor households who enjoy benefits of microfinance.

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Mosley and Banerjee et al. (1997) point out through their studies that credit is only one

factor in generation of income or output. Other complementary factors such as

entrepreneurial skills of the recipients make credit more productive. Most poor people do

not have basic education or experience to understand the nuances of managing a

business. They become risk averse, fearing that they may lose even what they have. This

is very likely as the emphasis is more on providing credit than creating an environment

for small enterprises to grow. Unless a framework of supportive policies, appropriate

training to run an enterprise, forward and backward linkages in the form of supply of raw

materials at economical prices and marketing facilities are created, there is every

possibility of failure of micro enterprises.

Highlighting the importance of savings in microfinance programmes Hulme and Mosley

(1997) maintain that the main demand for financial services from low income

Indonesians is for safe saving facilities. Similarly, in Sri Lanka, SANASA’s experience

illustrates that the highest priority of poorer households for financial services is for easy

withdrawal of saving programmes.

Dr. Vijay Mahajan (2005), a social entrepreneur and chairman of Basix and Aneel

Karnani (2007) also hold similar opinion. They believe that most people do not have

vision, skills and persistence to be entrepreneurs. Microfinance is a necessary but not a

sufficient condition to promote entrepreneurship. Forward and backward linkages are

imminent for microfinance to have positive impact.

The National Institute of Bank Management (NIBM) conducted a study on SHGs

promoted by Maharashtra Rural Credit Project (MRCP) in four districts of Maharashtra

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in 2001. It found out that SHG membership has led to increase in savings of members

and access to credit for various needs.

3.5 Microfinance and Impact on Financial Inclusion

There is a difference in the perception of financial inclusion between the RBI and other

researchers. While the central bank defines financial inclusion as the opposite of financial

exclusion in the following manner,

…the process of ensuring access to adequate credit and other financial services by

vulnerable groups at affordable costs (inclusive of geographical regions neglected in

the past (Dev 2006; Rajlakshmi 2007; Srinivasn 2007; The Hindu 2007).

Others define financial inclusion as,

The ability of every individual to access basic financial services, which includes

savings, loans and insurance in a manner that is reasonably convenient and flexible in

terms of access and design and reliable in the sense that the savings are safe and

insurance claims will be paid with certainty (Mor N. and Ananth 2007: 1121)

Thus, while the central bank’s approach takes into consideration mere provision of

financial services to the under-served, disadvantaged and low income groups at

affordable costs and without discrimination, the researchers believe that financial

inclusion should also include convenience, flexibility and safety in the design of financial

inclusion (Dev, 2008).

Puhazhendi (1995) studied SHGs in Karnataka and Tamil Nadu and found that the

intermediation by SHGs reduced the time spent by bank personnel in identification of

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borrowers, documentation, follow-up and recoveries, thereby reducing the transaction

costs of the banks by 40 per cent. Transaction costs of borrowers were also reduced by 85

per cent. A positive development is taking place in the mainstream banking sector. M S

Sriram (2005) mentions that many banks have found that microfinance can be a

profitable business proposition. The Rudrapur branch of the Oriental Bank of Commerce

(OBC) has followed a unique strategy, with its staff working in the field and keeping the

branch office closed during the day, forming SHGs to reduce transaction costs in the

future. The bank branch opens in the evening for a few hours. ICICI Bank has avoided

entering into microfinance market directly, instead, it has tried various models such as

encouraging formation of SHG groups (as in Madurai, Tamil Nadu) which could borrow

from the bank or by partnering with NGO-MFI network for acting as an agent to disburse

loans on behalf of the bank for a fee (Madurai, Tamil Nadu and Mirzapur, Uttar Pradesh)

and purchasing MFI portfolios in securitization deals (Hyderabad, Andhra Pradesh). The

bank aims at achieving mandatory priority sector lending targets and yet making profits

by banking with the poor with its innovative operations.

The public and private sector banks are showing keen interest in the area of

microfinance. Many well established private sector banks like HDFC, HSBC, ICICI,

ABN-AMRO together with private venture capitalists and social venture capitalists are

showing keen interest into microfinance (Lakshman 2006; Iyer 2006). The profit making

banks can cross subsidize loans to include the poor in mainstream banking. It will fulfil

twin objectives of financial inclusion and corporate social responsibility.

A study by Srinivasan (2010) on SHGs financed by the Canara Bank in 1993 in Madurai

district of Tamil Nadu shows that it was a profitable business for the bank to lend to

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SHGs as the repayment rate was 100%. The only tangible cost for the branch in servicing

the SHG loan accounts is the cost of keeping the savings and loan ledgers, loan

documents and a portion of the staff salary of the savings and loan section department.

A similar study by Ravinder Yadav (2010) in eight villages of Dehradun district in

Uttaranchal and by the Oriental Bank of Commerce (OBC) in Hanumangarh district in

Rajasthan shows that microfinance for commercial banks is profitable even under

regulated interest rates.

While examining ICICI bank’s foray into microfinance Nair et al. (2010) observe that

various models of microfinance such as portfolio buy-out, partnership and on-tap

securitisation have worked out to be profitable for the bank. The partnership model is

worked out with CASHPOR in Uttar Pradesh. The bank is working on this model with 25

MFIs, all partners of CARE, India’s largest microfinance programme. At present the

microfinance business of the ICICI bank is US$ 63 million (from 2002 to 2004) which is

a small amount of its total portfolio.

Harper (2010) advocates that group-based financing is more useful to MFIs and bankers

as they offer economies of scale. Self-help groups serve banks as unremunerated

retailers. They collect members’ savings and deposit them in the bank, maintain records

for which no remuneration is paid. They bridge the gap between members of their group

and staff of an MFI or a bank. In case of a loan default or an overdue loan recovery due

to illness of a member or other misfortune they have to perform the role of a recovery

agent, most difficult for an MFI or a bank. Considering the important role played by the

group members as distributers, appraisers, guarantors and recovery agents, the least

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financial service providers can do is provide them flexible loan products or low cost

loans, which is not the case.

Another attraction for group lending for MFIs and banks is the high quality of their loan

portfolios. The repayment rate is anywhere between 98% and 100%. This is due to peer

pressure and group cohesiveness (Harper, 2010).

3.6 Conclusion

It is difficult to draw comparisons among various impact studies due to heterogeneity of

programmes assessed and diversity of empirical methodologies used (Brau; Waller,

2004). On the basis of methodological options, Hulme (2000) identifies three broad

approaches of impact studies:

a. The scientific method (principally control-group surveys)

b. The humanities tradition (ethnography and other qualitative methods) and

c. Participatory learning and action (participatory qualitative tool that include, for

example, participatory rural appraisal, rapid appraisal and farming system research).

Impact studies are highly contextually specific and differ due to use of different

methodologies by the researchers. The fact is that microfinance movement has stirred up

the conscience of thinkers and policy makers all over the world. They experimented with

it to achieve the most important objective of poverty alleviation and the rest of it accrued

as a bonus in the form of empowerment, development and financial inclusion.

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Meyer (2002), commenting on innovative approaches at some MFIs, talks about the

concept of “critical triangle of microfinance” – the need for any MFI to manage

simultaneously the problems of outreach, meaning reaching the poor both in numbers and

depth of poverty; financial sustainability (meeting the operating and financial costs) and

impact (effect on quality of life of clients). There may be a trade-off between any two of

these critical objectives, as e.g., while maximising the outreach to the poor they may have

to sacrifice financial sustainability. MFIs are no panacea against poverty and their

usefulness varies by community and economic context.