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| ARTICLES > Micro Finance helps to eradicating Poverty in India - posted 8 Jun 2007 |
Micro Finance helps to eradicating Poverty in India - posted 8 Jun 2007[off-topic] Micro Finance helps to eradicating Poverty in India By N. Kavitha MBA, M.Phil, (Ph.D) (Research Scholar in Mother Teresa Women’s University, Kodaikanal) Lecturer-MBA Department SSM College of Engineering Komarapalayam. Namakkal-Dist. Tamil nadu.India Dr. A.Ramachandran M.Com, M.Phil, Grad.CWA, Ph.D Reader in Commerce SNR Sons College (Autonomous) Coimbatore. Tamil nadu.India Abstract 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 objectives. Introduction 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. Micro Finance 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 such as • deposits • loans • 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 by banks. 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 costs. 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 sustained. 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 microfinance institutions. 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 implementing projects. 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 needed. 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 finance 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. Conclusion 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 References Allerdice, April., Rogers, John H. Renewable Energy for Microenterprise. National Renewable Energy Laboratory (NREL). November, 2000 www.answers.com Chen, Alter Martha, ed. Beyond Credit: A Sub sector Approach to Promoting Women’s Enterprises. Ottawa: Aga Khan Foundation of Canada. 1996. Department of Environmental Affairs. Checklist of Environmental Characteristics. South Africa, 1992. Feoli, Marianella. South-South Information Transfer, at the Enterprise Level on Cleaner and More Efficient Production Options in the Costa Rican Food Industry. Paper presented to the Meeting of Experts on Environmentally Sound Technologies, Organization of American States. Ottawa. November 14-16, 1995. www.google.com Jansen, Anicca. Linking Microenterprise Development and the Environment: An Issues Paper and Workshop Proceedings. GEMINI Publications, USAID. 1995 Pallen, Dean. Environmental Sourcebook for Micro Finance Institutions. CIDA Asia branch. 1997.
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