Microfinance and the broader agenda

Updated: Jan 19 2007, 05:30am hrs
According to VISA International and the World Bank, the annual per capita expenditure of as many as four billion people ranges from less than $360 to $1,500. Commercial banks and credit unions have been reaching out mostly to those 1.7 billion people who have annual per capita expenditure between $1,500 and $20,000. Since the late 1970s, however, microfinance institutions (MFIs) in almost all developing economies have been doing their best to reach the poor and very poor. The United Nations has also assigned microfinance a specific role and responsibilty to contribute to the achievement of Millennium Development Goals (MDGs) by 2015: [i] enroll all children in primary school [ii] eliminate gender disparities in primary and secondary education [iii] reduce infant and child mortality rates by two-thirds [iv] reduce maternal mortality ratios by three-quarters [v] provide access for all who need reproductive health services [vi] reverse the loss of environmental resources. Thus, the integration of microfinance with MDGs can address human development deficiencies.

The microfinance programme in India has been under implementation since 1993, and as on March 31, 2006, over 22.35 lakh self-help groups (SHGs) were linked with banks; 90% of them were women groups, and Rs 113.98 billion had been disbursed to 32.98 million poor households. The average loan per group was Rs 50,917 (and per household, Rs 3,456). It is, however, disappointing that according to the National Sample Survey 59th Round [2003] estimates, of the total number of cultivator households, only 27% have received credit from formal sources. Some 22% received credit from informal sources. The remaining 51%comprising mostly marginal farmers have virtually no access to credit.

It is in this context, that we should attempt to appreciate the role of MFIs, in close collaboration with government, industrial houses and social organizations, in poverty-alleviation, generation of employment and income, improvement of health and nutritional status, empowerment of women and their human development.

Microfinance is generally construed as provision of financial services to mostly low-income people, especially the poor and very poor who are in many cases without any tangible assets (that banks may use as collateral). MFIs primary aim is to provide microfinance services. In most developing countries, the institutions involved in this include NGOs, commercial banks, state-owned development banks, financial cooperatives, and several forms of licensed and unlicensed non-bank entities.

A large number of MFIs in developing countries provide only credit to their clients, though they are keen to offer saving facilities to their members, borrowers and others from the general public for which, however, prudential regulation and supervision is called for. Microcredit is provided for the tiny informal business of micro-entrepreneurs and small-scale farmers. Clients use credit to meet a wide range of purposes, including emergencies, smoothening of consumption patterns and even the funding of social and religious obligations (and thus not strictly for productive purposes).

Clients use credit to meet a wide range of purposes, including emergencies, smoothening of consumption patterns and even the funding of social and religious obligations
Well-organised MFIs are expected to create significant impact on poor households in respect of following specific areas:

1. The provision of financial inputs and services enable enterpreneurs in informal sector to develop micro-enterprises.

2. Credit along with insurance services enable small- scale farmers to use high-yielding inputs and adopt new practices to increase productivity of land, livestock and labour leading to more food production and farm income. This may broadly promote better nutrition and health. These health and nutrition gains are more likely to be made if women participate in the training, as envisioned in several group-lending methodologies that have devised cost-effective training modules.

3. The provision of affordable credit and convenient savings services to poor families can help them gain easy access to cash throughout the year to reduce the impact of the annual hungry season; major expenses to meet social, religious and economic obligations (such as school fees or weddings; and/or to overcome shocks due to family illness, death of a breadwinner, loss of livestock/crop, or a natural disaster).

4. Womens empowerment and more generally, building of social capital, to support self help efforts at the family and community levels, and to strengthen the confidence of women and other marginalised groups to voice their rights and act as agents of local development. A composite empowerment indicator is based on seven components: mobility, economic security, ability to make small purchases, involvement in major household decisions, relative freedom from domination within the family and political and legal awareness. Control of the use of loan is considered a major indicator of a woman borrowers empowerment.

MFIs may need to seek cooperation of governments, industrial houses and social organisations in the area of human development of the poor, such as, enrollment of all children in primary school, elimination of gender disparities in primary and secondary education; reducing infant, child and maternal mortality ratios, provision of access to all who need reproductive health services.

These have been recognised as Millennium Development Goals by the United Nations to be achieved by 2015. Microfinance has a role to play.

To be concluded tomorrow

The authors are professionals with decades of field experience in microfinance planning