Micro Finance helps to eradicating Poverty in India - posted 8 Jun 2007
Micro Finance helps to eradicating Poverty in India
MBA, M.Phil, (Ph.D)
(Research Scholar in Mother Teresa Women’s University, Kodaikanal)
SSM College of Engineering
M.Com, M.Phil, Grad.CWA, Ph.D
Reader in Commerce
SNR Sons College (Autonomous)
Micro enterprises cover a wide range of business
activities - some of which have negative environmental impacts. These
impacts range from small-scale industrial pollution to land degradation
from agricultural (crop and cattle grazing) activities. Some micro
enterprises have significant impacts in and of themselves, while others
are of concern because of their cumulative ramifications. With the
rapid expansion of microfinance and its anticipated future growth there
is an increasing need to address the environmental effect of micro
enterprise activities. Microfinance institutions have a special
opportunity for stimulating economic development while addressing the
looming ecological problems that threaten developing countries and the
global environment. The potential for contributing to sustainable
development is immense. Socioeconomic conditions in many developing
nations are quite compelling in this context. Most third world
countries are experiencing rapid population growth. Developing nations
are simultaneously undergoing economic growth and industrialization.
These countries also contain most of the world’s high biodiversity
regions. All this combines to create conditions of increased natural
resource scarcity and degradation with implications on local, regional
and global scales. Based on these realities it is imperative that
development planners focus on integrating conservation and development
Microfinance is the supply of loans, savings, and other
basic financial services to the poor. People living in poverty, like
everyone else, need a diverse range of financial instruments to run
their businesses, build assets, stabilize consumption, and shield
themselves against risks. Financial services needed by the poor include
working capital loans, consumer credit, savings, pensions, insurance,
and money transfer services. The poor rarely access services through
the formal financial sector. They address their need for financial
services through a variety of financial relationships, mostly informal.
Credit is available from informal commercial and non-commercial
money-lenders but usually at a very high cost to borrowers. Savings
services are available through a variety of informal relationships like
savings clubs, rotating savings and credit associations, and mutual
insurance societies that have a tendency to be erratic and insecure.
Microfinance sector is both old and new - people have
always been borrowing, lending and saving for as long as there has been
money (and in kind before). They have done this within their own
communities, using their own systems and methods, without any external
’assistance’ or resources. The sector is new in that it has primarily
developed as a response to the inability or apathy of commercial banks
and the formal financial system to serve the needs of low-income
households and micro enterprises.
Microfinance: Financial Services for the Poor
Microfinance plays a significant role overarching goal to reduce
poverty in India. Providing access to microfinance can prove to be an
effective way of reaching the poor and improving their lives.
Microfinance is the provision of a broad range of financial services
• payment services
• money transfers
• insurance to poor and low-income households and their micro enterprises
Three Types of Sources of Microfinance
• Formal institutions - i.e. rural banks and
cooperatives • Semiformal institutions - i.e. non government
organizations • Informal sources - i.e. money lenders Institutional
microfinance includes microfinance services provided by both formal and
semiformal institutions. Microfinance institutions are institutions
whose major business is the provision of microfinance services.
Principles of Micro Finance
Poor people need a variety of financial services, not
just loans. Like everyone else, the poor need a range of financial
services that are convenient, flexible, and affordable. Depending on
circumstances, they want not only loans, but also savings, insurance,
and cash transfer services.
Microfinance is a powerful tool to fight poverty. When
poor people have access to financial services, they can earn more,
build their assets, and cushion themselves against external shocks.
Poor households use microfinance to move from everyday survival to
planning for the future: they invest in better nutrition, housing,
health, and education.
Microfinance means building financial systems that
serve the poor. In most developing countries, poor people are the
majority of the population, yet they are the least likely to be served
Microfinance is often seen as a marginal sector-a
“development” activity that donors, governments, or social investors
might care about, but not as part of the country’s mainstream financial
system. However, microfinance will reach the maximum number of poor
clients only when it is integrated into the financial sector.
Microfinance can pay for itself, and must do so if it
is to reach very large numbers of poor people. Most poor people cannot
get good financial services that meet their needs because there are not
enough strong institutions that provide such services. Strong
institutions need to charge enough to cover their costs. Cost recovery
is not an end in itself. Rather, it is the only way to reach scale and
impact beyond the limited levels that donors can fund.
A financially sustainable institution can continue and
expand its services over the long term. Achieving sustainability means
lowering transaction costs, offering services that are more useful to
the clients, and finding new ways to reach more of the unbaked poor.
Microfinance is about building permanent local
financial institutions. Finance for the poor requires sound domestic
financial institutions that provide services on a permanent basis.
These institutions need to attract domestic savings, recycle those
savings into loans, and provide other services. As local institutions
and capital markets mature, there will be less dependence on funding
from donors and governments, including government development banks.
Micro credit is not always the answer. Micro credit is
not the best tool for everyone or every situation. Destitute and hungry
people with no income or means of repayment need other kinds of support
before they can make good use of loans.
In many cases, other tools will alleviate poverty
better-for instance, small grants, employment and training programs, or
infrastructure improvements. Where possible, such services should be
coupled with building savings.
Interest rate ceilings hurt poor people by making it
harder for them to get credit. It costs much more to make many small
loans than a few large loans. Unless micro lenders can charge interest
rates that are well above average bank loan rates, they cannot cover
Their growth will be limited by the scarce and
uncertain supply soft money from donors or governments. When
governments regulate interest rates, they usually set them at levels so
low that micro credit cannot cover its costs, so such regulation should
be avoided. At the same time, a micro lender should not use high
interest rates to make borrowers cover the cost of its own inefficiency.
The role of government is to enable financial services,
not to provide them directly. National governments should set policies
that stimulate financial services for poor people at the same time as
protecting deposits. Governments need to maintain macroeconomic
stability, avoid interest rate caps, and refrain from distorting
markets with subsidized, high-default loan programs that cannot be
They should also clamp down on corruption and improve
the environment for micro-businesses, including access to markets and
infrastructure. In special cases where other funds are unavailable,
government funding may be warranted for sound and independent
Donor funds should complement private capital, not
compete with it. Donors provide grants, loans, and equity for
microfinance. Such support should be temporary. It should be used to
build the capacity of microfinance providers; to develop supporting
infrastructure like rating agencies, credit bureaus, and audit
capacity; and to support experimentation.
In some cases, serving sparse or difficult-to-reach
populations can require longer-term donor support. Donors should try to
integrate microfinance with the rest of the financial system. They
should use experts with a track record of success when designing and
They should set clear performance targets that must be
met before funding is continued. Every project should have a realistic
plan for reaching a point where the donor’s support is no longer
The key bottleneck is the shortage of strong institutions and managers.
Microfinance is a specialized field that combines
banking with social goals. Skills and systems need to be built at all
levels: managers and information systems of microfinance institutions,
central banks that regulate microfinance, other government agencies,
and donors. Public and private investments in microfinance should focus
on building this capacity, not just moving money.
Microfinance works best when it measures-and
discloses-its performance. Accurate, standardized performance
information is imperative, both financial information (e.g., interest
rates, loan repayment, and cost recovery) and social information (e.g.,
number of clients reached and their poverty level). Donors, investors,
banking supervisors, and customers need this information to judge their
cost, risk, and return.
Microfinance and the Environment
During much of the last three to four decades, two
parallel developmental forces can be discerned: a growing awareness of
the effects of human activity on the earth and its resources, and the
realization of a need for decentralized and localized decision making
system that empowers ordinary citizens to decide on aspects that affect
their life. Microfinance’s role in these processes is no doubt
important as a supportive and facilitates resource. Its role can be
understood from the point of view of its ability to directly and
indirectly influence and enable community- sensitive actions, which in
turn affect the environment.
Microfinance’s viability in removing environmental problems lies in three factors:
Externalities of credit- the availability of the
right quality and quantity of credit at the right time, generates
several externalities. Enablement of very local/grass roots activity
that are essentially ’people-centered’ Adoption of a
poverty-eradication focus with community organizing and development as
its primary gateway.
Microfinance and Community Development
The availability of adequate and timely microfinance
services for low-income households has many effects on the development
of a community. It can directly effect community organizing and
development as a part of the microfinance activities, and it can also
indirectly enable and facilitate community development as an
externality of credit itself. Microfinance therefore enables collective
action, the coming together of the community which is an important
ingredient of participation of the community in its development. Formal
and informal education and training are also enabled - for leaders and
other members of the community in skills that will allow them to
locally design, develop and manage community projects.
The enablement also has wide effects on environmental
development. This can be seen in greater awareness of the community in
its internal potentials, in its ability to interact together to solve
its own problems. It also illustrates the power of local
decision-making process that take place at the level of the community.
Microfinance and Poverty
A considerable proportion of the population in
developing countries are still below the poverty line particularly in
India Poverty is not a cause, but an effect of lopsided priorities,
policies, and resource distribution. Programmes and projects that
target poverty through microfinance have enabled higher income
generation for the households through a variety of economic and other
activities. This is particularly through training and skill development
activities, which have led to better job opportunities and higher
incomes. Such targeting has lead, no doubt, to greater awareness of
environmental issues. Better skills and products has meant the use of
technologies and materials that have less side effects, less hazardous,
and better recycled. This has also accorded greater importance to
individual safety and health in the long run.
Microfinance and Micro enterprises
Microfinance is a ’common denominators’ for a micro
entrepreneur against which many other developmental actions depend.
Access to good quality and quantity of credit has enabled the
generation of innovative solutions in technology, manufacturing and
marketing processes. These solutions have also been cost-effective. Due
to the very nature in which micro enterprises are structured, use of
sustainable and appropriate technology has ensured that minimal waste
has been generated, with many by-products recycled for other uses.
Contrary to popular belief, micro enterprises have used
goods and processes that are environmentally ’light’ and sustainable.
Many extensively depend on recycled and other ’waste’ products as raw
materials. It has to be understood that sustainability and
appropriateness of a micro enterprise’s processes and products are a
way of life, more than an induced concept. Micro finance and Macro
The growing realization of the importance and positive
effects of microfinance on poverty, on micro enterprises, on households
etc. has generated considerable interest in its potential to reach
low-income families who have traditionally been sidelined by formal
financial institutions. Opportunities to invest in funds geared towards
microfinance have increased over the last few years, particularly
focusing on investments that support sustainable development activities
at the local level. Interest has also been focused on decentralized
investment - where the local economy is emphasized, and local profits
and benefits go back to the local economy.
In terms of the environment, this has essentially meant
the availability of funds to generate environmentally sensitive and
sustainable solutions that go beyond the cliches. The realization that
small local activities has many wider repercussions and effects
globally, emphasizes the need for local solutions at the micro-level,
which is where microfinance comes in.
Around the world, a revolution is occurring in finance
for low-income people. The microfinance revolution is delivering
financial services to the economically active poor on a large scale
through competing, financially self-sufficient institutions. In a few
countries this has already happened; in others it is under way. The
emerging microfinance industry has profound implications for social and
economic development. For the first time in history, capital is well on
its way to being democratized
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