PAPER PRESENTATION ON

MICROFINANCE AS INNOVATIVE TOOL FOR POVERTY REDUCTION

PRESENTED BY

MRS.B.Ramya HariGanesan., M.F.C., M.PHIL.

RESEARCH SCHOLAR

16A/8, GANDHI NAGAR III Street,

Opp. to good shepherd institute of medical ACADEMY, RaNiPeT,

Vellore Dt.623401

IN

NATIONAL CONFERENCE ON achieving millennium development goals (mdg)

challenges and future in the theme Microfinance is a milestone towards

“Fighting against poverty and for gender equality

To be HELD ON

March 13TH & 14th, 2014 BY

School OF MANAGEMENT STUDIES IN

VelLs University (Est. u/s.3 of the UGC Act, 1956)

Velan Nagar, P.V. Vaithiyalingam Road, Pallavaram, Chennai - 600 117.Ph: 2266 2500 / 01 / 02 / 03 Fax: 2266 2513

Web: www.velsuniv.ac.in Email: ncmdg2014@gmail.com

PAPER PRESENTATION ON MICROFINANCE AS INNOVATIVE TOOL FOR

POVERTY REDUCTION

ABSTRACT:

India falls under low income class according to World Bank. It is second populated

country in the world and around 70 % of its population lives in rural area. 60% of people

depend on agriculture, as a result there is chronic underemployment and per capita income is

only $ 3262.According to the planning commission report, the number of those below the

poverty line declined to 21.9% of the population in 2011-12, from 29.8% in 2009-10 and 37.2%

in 2004-05. In this 22%, 25.7% of people in rural areas, 13.7% in urban areas. This shows that still in

rural areas poverty is to be alleviated to increase our economic growth. The major factor account for

high incidence of rural poverty is the low asset base. But compared to 2004-05 the poverty is

alleviated up to 3.3% which is a positive sign which is achieved through microfinance. To achieve the

objective of poverty reduction the scheme of microfinance has been found as an effective instrument for

lifting the poor above the level of poverty by providing them increased self-employment opportunities

and making them credit worthy. Thus the concept of micro finance gained growing recognition as

an effective tool in improving the quality of life and living standards of poor people.

Microfinance is the provision of financial services to low-income clients, including consumers

and the self-employed, who traditionally lack access to banking and related services. This

particular paper focuses on microfinance which helps to promote economic growth and

development in Indian rural areas.

INTRODUCTION:

As our father of Nation Mahatma Gandhi’s wordings says,” AS YOU ARE UPLIFTING

THE POOR THEN YOU ARE UPLIFTING THE NATION”, Micro finance is a tool to attack

poverty all over the world. Micro finance could be defined as, “Provision of thrift, credit and

other financial services and products of very small amounts to the poor in rural, semi-urban or

urban areas, for enabling them to raise their income levels and improve living standards”

EVOLUTION OF MICROFINANCE:

Muhammad Yunus, a Bangladeshi economist, founder of the Graamen Bank, and Nobel

Peace recipient in 2006, pioneered the concept of microfinance in the 1970s. But microfinance

is, in fact, an ancient practice used during the age of Babylonians.

In the beginning: Rotating savings and credit association (ROSCA)

In India, microcredit appeared 3,000 years ago. It took three main forms: Traditional

private lenders, merchants’ guild and ROTATING SAVINGS AND CREDIT ASSOCIATION

(ROSCA).ROSCA consists of a group of people building a savings and lending cycle. Members

meet regularly and every one of them contributes equally to a fund financing the revolving loan

of which each member benefits during the cycle, each one in turn. This system was created

centuries ago in different parts of the world. It’s called “TONTINE" in Africa, "ANDAS" in

Mexico, "PASANAKU" in Bolivia, "ARISAN" in Indonesia, "CHEETU" in Sri Lanka, and

‘‘ESUSU’’ in Nigeria... This form of savings is still in use today. 

In the XIXth Century: Micro loans and collective savings to face crisis

In Ireland, after the great famines of the XVIIth and XVIIIth centuries, national

thinker Jonathan Swift advocated the microloan, which allowed breaking the poverty cycle. He

set up the Irish Loan Funds that supported up to 20% of Irish families every year. In Germany in

1848, Mayor Friedrich Raiffeisen was trying to bypass private lenders. He realized that savings

cooperatives were more effective than charity to allow poor people to get out of their

dependency on private lenders. He created the first Credit Union, with in the end reached 2

million farmers. The idea was taken up in Europe and North America, followed by Indonesia and

Latin America.

In the 1970s: The Rebirth of Microfinance

Experimental programs are launched in Bangladesh and Brazil, where social micro

loans are granted to groups of women investing in micro businesses. Microcredit was given a

boost thanks to Professor Muhammad Yunus. After studying the ineffective and unproductive

economic model of poor craftswomen, he decided to create an institution to help these women:

the Grameen Bank. The first modern microfinance bank was born. Professor Yunus completely

upended traditional bank prejudices by proving that the poor were very reliable at repaying their

loans.

Towards the XXIth Century

At the end of the 1990s, the success of microcredit allowed for the development of

microfinance, which includes a range of financial services intended for poor people: Credit,

savings, insurance, and support. There is a growing securitization of microfinance, which must

be supervised and regulated so that microfinance remains a social tool for the development of

poor populations.

IMPACT OF MICROFINACE IN POVERTY ALLEVATION:

Micro-Finance is emerging as a powerful instrument for poverty alleviation in the new

economy. In India, micro-Finance scene is dominated by Self Help Groups (SHGs) - Banks

linkage Programme, aimed at providing a cost effective mechanism for providing financial

services to the 'unreached poor'. Based on the philosophy of peer pressure and group savings as

collateral substitute, the SHG programme has been successful in not only designing financial

products meeting peculiar needs of the rural poor, but also in strengthening collective self-help

capacities of the poor at the local level, leading to their empowerment.

WHAT IS POVERTY?

Poverty is general scarcity or dearth, or the state of one who lacks a certain amount of

material possessions or money. Absolute poverty or destitution refers to the deprivation of basic

human needs, which commonly includes food, water, sanitation, clothing, shelter, health care and

education. Relative poverty is defined contextually as economic inequality in the location or

society in which people live.

VERY POOR POOR BORDERLINE NON-POOR

HO

US

ING

Small kuccha

houses

Mostly small houses, either

kuccha or mixed

Medium size, usually mixed or

pucca

Mostly large, pucca houses

AS

SE

TS

No major

assists, basic

utensils only

Marginal land(<1 acre).few

small animals, cot, radio,

cycle, TV, one or two gold

jewels

Small(1-5 acre),land holding,1-

2 mulch castle, small animals,

TV, fan, bicycle ,radio, some

furniture, two-wheeler,

computer, some gold jewels

Large(>5 acres),landholding,>2

mulch cattle, tube well, TV,

Phone, Fridge, motor cycle, car,

Lap top, Tab with each member,

many gold jewels, all electronic

items.F

OO

D S

EC

UR

ITY

Usually one

meal a day-

basic cereals

only

Just able to manage two

meals a day-but variable

2 meals a day but sometimes

face problem(a few weeks in a

year)

Regular family diet-(2 meals/day

and ‘quality’ items)

VERY POOR POOR BORDERLINE NON-POOR

INC

OM

E

SO

UR

CE

S

Low paid casual

wage labour,

single earner

Regular wage labour,1-2

earner

Seasonal businesses, low paid

jobs, may sometimes depend on

skilled wage labour

Assured regular income, ex:

established business/high pay

jobs

PO

VE

RT

Y

LIN

E

Below Above: May slip into poverty

in case of an income shock

Above

HOW POVERTY CAN BE REDUCED?

Poverty reduction refers to a process involving some strategies aimed at

reducing the levels of poverty in a given society. This is done by increasing the

availability of basic human needs or increasing disposable income required to

provide for these needs. Basic human needs in this case include health care, clean

water, food and education. So, Poverty can be reduced by making the people to get income

to purchase basic needs like,

Food and other goods

Health care and education

Removing constraints on government services

Reversing brain drain

Increasing personal income

Access to financial services

Cultural factors to productivity

USAGE OF MICROFINANCE IN REDUCING POVERTY:

Microfinance is based on the belief that: “Poor people have skills and a capacity to

produce for the market but have lacked access to financial services. They have faced

usurious interest rates and have had to deal with interlinked markets in ways which reduce

their earnings.” (Greeley 2003:12)

According to the Consultative Group to Assist the Poor (CGAP):“Financial services for

poor people have proven to be a powerful instrument for reducing poverty, enabling them

to build assets, increase incomes, and reduce their vulnerability to economic stress.”

(CGAP 2010).

PATTERN OF MICROFINANCE OUTREACH:

EVIDENCE OF POVERTY REDUCTION THROUGH MICROFINANCE:

In our country there are many beneficiaries who increased their cost of living using

microfinance. This can be explained using the below case studies:

MFI LOAN HELPS A WIDOW TO GROW HER BUSINESS AND PLAN

FUTURE EXPANSION CLIENT'S HUSBAND INVESTS A SERIES OF MFI

LOANS IN HIS MANUFACTURING UNIT

When Saraswathiamma's husband died she was forced by her son and daughter-in-

law to live separately and fend for herself. She borrowed Rs1, 000 ($25) from her neighbours

(interest-free) and opened a tiffin centre in her house where she serves idly/sambar and tea,

seven days a week. Business was good and she soon repaid the startup capital. She was

looking for more credit to expand the enterprise when some of her neighbours suggested she

join the MFI group. She joined a new group of the MFI in 2000. Within the same year she

took a loan of Rs4, 000 ($90) which she used to purchase an electric grinder, to save her

time, allowing her to do several other tasks. The second loan of Rs5,000 ($110) she used to

purchase material in bulk, enabling a discount from the retailer, involving one weekly visit to

the market in town, instead of the earlier daily visits. Saraswathiamma has repaid both loans

on time. Now she is thinking of starting a new hotel outside the village (on main road),

though not for herself but for her son.

CARVING ONE’S LIVELIHOOD WITH MFI

Atchyutha Anjaneyulu, born in a poor family and with no formal education, lived

with his father and assisted him in running a small teashop. The family struggled with

meagre income. To increase his prospects, he migrated with his wife and father to another

town and initially started a small tea stall, which was patronised by a few customers.

However, the income was meagre and he was not able to make much profit t. Besides, he had

three children, all attending government school and assisting him in his tea stall business

during their leisure time. Anjaneyulu heard about the MFI group and enrolled as a member

and approached for a loan of Rs. 10,000, which was sanctioned to him. With the first loan

amount, he acquired a house on lease at a rent of Rs. 300 per month and started a Tiffin n

centre. His business gradually improved and his profit rose from Rs. 200 to Rs. 250 a day. He

repaid the loan in 12 installments and took a second loan of Rs. 15,000 for starting a

provision shop. Gradually, his business grew in size and stature and so his profits and he was

left with a surplus of Rs. 300 to Rs. 400 per day He opened a savings account and started

saving Rs. 50 per day, in the name of his daughter. To increase his business prospects further,

Anjaneyulu wanted to clear up the present loan and take another loan, for a larger amount, in

order to purchase the rented house, presently occupied by him and his family. Anjaneyulu

was of the opinion that MFI should grant loans at a lower rate of interest so that repayment

was easier. Mr. Anjaneyulu’s case demonstrated how the support of micro credit was capable

of bringing about change in the economic condition and raising the standard of living.

MFI ASSISTANCE ENABLED A FAMILY TO SUSTAIN ITSELF AND

IMPROVE ITS STANDARD OF LIVING

Smt. K. Bujji, a poor illiterate woman lived with her husband, two sons and in-laws.

Besides working as a wage laborer outside, she also assisted her husband, a marginal farmer,

to cultivate the land leased to them. But, this did not take care of even the bare requirements

of the entire joint family. The lease amount had to be paid out of loans borrowed from

moneylenders at exorbitant rates of interest. On being made aware of the MFI, she joined the

group and took her first loan of Rs. 5,000. The investment yielded substantial income and

enabled her to clear off the first loan and then she took the second loan of Rs. 6,000. With

this amount in hand, she and her husband added their own savings of Rs. 4,000 and

purchased a buffalo which yielded a she-calf. When the she-calf matured it was sold for an

amount of Rs. 12,000. Subsequently, the third and fourth rounds of loans were taken by Bujji

for leasing land for cultivation. The standard of living of Bujji and her family improved and

she was able to educate her children and also acquire household assets, which amply proved

that MFI assistance had enabled Bujji and her family to improve their living conditions and

rise above their misery and poverty.

In India according to the mix-market report on micro finance it is evident that from

2000 up to 2012 there is a considerable increase in asset position, deposit balance directly

with the increase in the MFI count. It is depicted in the table and chart below:

YEARMFI COUNT

ASSETS POSITION (IN LAKHS)

AVERAGE DEPOSITS (IN LAKHS)

2000 11 5.01 2001 11 9.48 2002 13 18.63 2003 39 6.49 13.022004 86 7.29 9.9752005 91 9.73 14.62006 104 18.07 11.572007 78 64.79 25.952008 97 55.46 16.092009 120 51.19 22.5552010 123 54.14 24.992011 118 59.58 22.1052012 84 125.12 48.035

Source: mix-market.org

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

20406080

100120140

MFI Count

MFI Count

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

20406080

100120140

Assets (Median)

Assets (Median)

20002001

20022003

20042005

20062007

20082009

20102011

20120

10

20

30

40

50

Average deposit account balance (Median)

Average deposit account balance (Median)

CONCLUSION:

Thus it is to conclude that from the above case studies analyzed by SIDBI and secondary

data’s available in www.mixmarket.org it is evident that Micro finance plays an effective tool to

reduce poverty and even to eradicate poverty in an efficient way. Thus we can say that MICRO

FINANCE as the one which plays

Major role In Controlling Recommending and Organizing Finance to Innovative Nascent

Entrepreneurs and having Novel ideas to Come up in their life, overall to Eradicate poverty

in the nation through eradicating poverty from individuals.

BIBLIOGRAPHY:

REPORTS:

SIDBI report on National study on Indian Microfinance sector 2008

Micro finance India state of sector report 2012

Concept paper on microfinance institutions in India by Piyush Tiwari and S.M. Fahad

NABARD report on 2012-13

Government of India Annual report 2012-13

WEBSITES

www.mixmarket.org

www.en.wikipedia.org/wiki/ Microfinance

www. microfinance gateway.com

www. microfinance focus.com

www.india microfinance .com

www. microfinance india.org

BOOKS AND MAGAZINES:

Economic Times

Hindu Business Line

Business Standard