Microfinance A Platform for Social Change Heena Gianchandani B.A.(Hons), M.S.W, (Delhi School of Social Work) (Gold Medalist), Delhi University o BOOKWELL Delhi
Contents Preface. D" Acknowledgement xxi List ofabbreviations xxiii 1. Evolution and Development of Microfinance 1 Review of the Literature 3 In the Beginning: the 1950s to 1970s 4 Gaining Traction: Microfinance Research in the 80s and 90s 6 Point of Departure: Microfinance in the 21st Century 11 Dominant Discourses: Credit First and Integration Next 25 The Credit First Approach 25 Integration: The Financial Services Approach 35 Member-owned Institutions: A Savings Led Model 44 MOI Types 46 Drivers of Outreach 52 Conclusion 54 2. Poverty and Microfinance 85 History of Ideas about Poverty 86 Definitions and Concepts 89 Theories and Poverty 91 Income 91 Basic Needs 94 Human Capability 95 Chronic Poverty 97 Subjective Poverty 100 Assets and Sustainable Livelihoods 102 Poverty and Vulnerability 104 Revisiting References to Poverty in the Microfinance Discourse 106
xxxii Microfinance: A Platform for Social Change Cursory Acknowledgement Explicit Affiliations Implicit Affiliations Direct Engagement iu/ ^ ^ HO Formulating a Theory of Microfinance and Poverty 112 The Credit First Approach 112 Financial Services Approach 114 Conclusion H6 3. Development of Microfinance in India: How it Empowers Women 145 Meaning and Definition of Micro-Finance 145 A Brief History of Microfinance 146 Micro Finance in India 147 Profile of Micro Finance in India 149 Need for Micro Finance 149 Key Players of Micro Finance System 150 National Bank for Agricultural and Rural Development (NBARD) 150 Reserve Bank of India 152 Seif Help Croups 154 Micro Finance Institutions (MFIs) 157 Non Government Organizations (NGOs) 158 Studies analyzing the Micro Financing in India 159 Summary Results of Studies on Micro Financing in India 163 Rationale of chapter 164 Poverty in India 165 Microcredit and the Banking System in India 165 Status of Indian Women 170 A Glance at Microfinance 170 Microfinance's Impact on the Poor 174 Microfinance Drawbacks, Solutions, Benefits and Success 175 j
Contents xxxiii Different Types of Microfinance Institutions. 180 Microfinance in India 182 Microfinance rankings and loan size 185 Dalit Gaste and Microfinance 186 Different Types of Microfinance Institutions 187 The case of Shri Kshetra Dharmasthala Rural Development Program (SKDRDP) 189 The case of BASIX 191 Women's Status in India and the Need for Empowerment 194 Regional Difference between Women are Viewed 195 Women's Role in Indian Society 196 Microfinance's Impact on Women Empowerment 199 Microfinance Case Studies in South India 205 Microfinance Program in West Bengal 206 Microfinance Programs in Bangladesh and Bihar 210 Microfinance Program in Karnataka 211 How Microfinance Programs have Helped Women Gain Empowerment (Study done in South Africa) 215 Conclusion 217 4. Sequential Group Lending: A Mechanism to Raise the Repayment Rate in Microfinance 223 Introduction 223 Applications 224 Perfect Enforcement 225 Individual Lending 226 Simultaneous Group Lending 226 Sequential Group Lending 227 Comparative Statics: The Distribution of Project Returns 228 Imperfect Enforcement 231 Social Sanctions 232 Individual Lending 233
xxxiv Microfinance: A Platform for Social Change Simultaneous Group Lending 234 Sequential Group Lending 235 Comparative Statics: Contract Enforcement 239 Minimum Amount of Enforcement Required 241 Conclusion 243 5. MFI Bill-2012, A Brief Analysis 251 6. Grameen Bank: A Barometer of Microfinance 263 History 263 Application of Microcredit 265 Village Phone Program 267 Struggling members program 267 Grameen Bank's Perception of People with Economic Disadvantages 267 Operational statistics 268 Honours 269 Criticism 270 7. How to Start PhD. in Microfinance: A Platform for PhD. Solution 277 Guidance Process 278 Comprehensive Consulting services for PhD Thesis/Dissertation 279 About 280 Hire a PhD Guide 281 Guidance Process 283 Services Offered 284 Proposal/Synopsis Development 284 Steps in writing Literature Review for your Thesis/ Dissertation / Research 285 Writing formatting Chapters 288 Research Methodology selection 289 Research Methodology for PhD Thesis/Dissertation 289 Questionnaire Design 290 Data Collection 291
Contents xxxv Qualitative Research 292 Statistical Help 293 Synopsis Asistance for phd Thesis 293 Thesis Writing Tips 294 Proofreading Service 296 PhD Thesis Editing and Proofreading 296 Addressing Comments from Committee 297 Prices 298 PhD Thesis should be prepared 298 Handling an assignment with a short deadline 299 The Concept of Vailidity 300 Tips to the researcher 301 Interviewing Known People 302 Understanding Data Sampling 303 8. Historical Background and Presen* Status of Micro-Finance in India 305 Major initiatives in Rural Credit 306 Shivaraman Committee 307 Reserve Bank of India' s All India Rural Credit Surveys 308 Formal/ Banking sector initiatives 308 SEWA Co-operative Bank (1974) 309 Seif Help Croups (SHGs) 310 National Bank for Agriculture and Rural Development 310 Rashtriya Mahila Kosh (RMK), 1993 310 Small Industries Development Bank of India (SIDBI), 1994 310 SHG-Bank Linkage Programme (1996) 311 Microfinance Development and Equity Fund (MD & EF), 2001 311 Micro Finance Programme (MFC), 2004 311 Micro Finance Bill (2006) 312 Models of Micro-Finance in India 313 Bank-SHGs Linkage Programme 314 Agency model of MFI 316
xxxvi Microfinance: A Platform for Social Change MFI Bulk Lending Model 316 Micro Finance and PACS 317 Post Office Network and Banking Services 318 Business Facilitator & Correspondent Models 318 Micro Credit Models in Other Countries 319 Role of Technology and Micro-Finance 320 Information and Communication Technology (ICTs) and Micro-Finance Activities 320 Common Service Centre 321 Computer Munshi System 322 Micro Finance Performance in India 322 SHGs 324 Exclusive Women SHGs 325 Agency-wise 325 Agency-wise Exclusive Women SHGs 326 Agency-wise NPA Status 327 Region-wise NPA Status 327 Agency-wise & Region-wise NPAs 327 Issuing of Micro-Finance in India 331 Legal Issues 331 Gender Issues 332 Increasing accessibility of the poor 332 Rate of Interest 333 Unbalanced Geographica! Growth 333 Choice of productive activities 334 Assessment of Demand 334 Subsidy 335 Capacity building 335 Records Maintenance 335 Auditing 335 Transparency 33g
Contents xxxvii Absence of Policy 336 Absence of Information/ Statistical data 336 Recommendations 337 Access to Credit 337 Formation of Consortiums by Banks 337 Uniform Legal Framework 338 National Micro Finance Policy 338 Uneven Geographica! Growth 338 Mobilisation of Savings by MFIs 339 Cost Covering Interest Rates 339 Credit-Linked Subsidy 339 Role of Technology 339 Maintaining Standard Accounting System 340 Existing Services 340 Micro Insurance 341 Capacity Building 341 Transparency 342 Availability of Information/Statistics 342 9. Some Fundmental Questions on Microfinance 345 10. Financial Inclusion 355 11. Competition and Performance of Microfinance Institution 377 Introduction 377 Competition and Microfinance 378 Hypotheses 383 Competition and Outreach 383 Competition and Loan Repayment and Portfolio Quality 383 Competition and Cost Efficiency 384 Competition and Profitability 384 Measuring Competition 385 Empirical Approach 387 Data 390 Empirical Analysis 397 Summary and Conclusions 401
xxxviii Microfinance: A Platform for Social Charge 12. Risk in Microfinance Over-Indebetedness: A Customer Protection Point of View 407 Introduction 431 Conclusion 431 13. Methods of Microfinance 441 Credit - Financial Inclusion or Poverty Alleviation 441 The Solution... Group Approach 441 SHG Bank Linkage Programme 441 SHG Bank Linkage Programme 441 Aim 441 The Core Strategy of SHG-Bank Linkage Programme 442 Design features of SHGs 443 The Seif Help Group (SHG).. What is it 444 Group Funds 444 Mode of Functioning of SHGs 444 Types of Credit 445 Progress - 2008-2009 445 Joint Liability Group 445 Objective 445 Criteria for Selection of JLG members 446 Size of the JLG-4 to 10 farmers 446 Formation of JLGs by 446 Saving by JLG 446 JLGs Models 447 Important Factors in JLG approach 447 Purpose of Credit 447 Loan Limit 447 Rate of Interest 447 Margin & Security norms 44g Documents 44g Personal Accident Insurance 44g
Contents xxxix Incentive for Promotion of JLGs from NABARD 448 Monitoring & Review 448 JLG - SHG Difference 449 Farmer 7 s Club Programme 449 Mission 449 Functions 450 NABARD's support to Farmer Clubs 451 Benefits of Farmers' Club to Bank Branch 451 Other Benefits 451 Who can form Farmer's Clubs 452 The Set up 452 Functions of the Office bearers 452 Membership 452 Steps in the formation of Farmers' Clubs 453 Rating of Farmers Clubs 454 Incentives 454 Financial Support from NABARD 454 Revival Package of Assistance for Dormant Clubs 455 14. Microfinance by Behavioural Phenomenon of Projection Blas Over Borrower's Habit Formation 457 Introduction 457 Background 460 The Environment 461 Borrowing on Fiat Interest Rates 462 Borrowing from a For-Profit 462 Borrowing from an Altruistic Lender 463 The Altruistic Lender and the For-Profit Coexit 466 Statte Comparision 466 The Equilibrium 468 Frequency I - Transaction Costs 469 Borrowing from a For-Profit 470
Microfinance: A Platform for Social Change Borrowing from an Altruistic Lender 471 Frequency II- Incomplete Contract Enforcement 4/_ Over-investing 476 Discussion and Comparision To Hyperbolic Discounting 478 A Small Model on Hyperbolic Discounting 478 The Period Zern Agent - The Weifare Maximizing Contract 479 The Period One Agent - The Chosen Contract 479 Conclusion 481 The Macroeconomics of Microfinance 487 Empirical Motivation 492 Microcredit Programs 492 Existing Literature 496 Savings Heterogeneity 498 Model 499 Preference 500 Technology 500 Credit (Capital Rental) Markets 501 Microfinance 502 Recursive Representation of Individuais' Problem 503 Stationary Competitive Equilibrium 504 Quantitative Analysis 505 Calibration 505 Short-Run Partial Equilibrium Results 507 Comparison with Microvaluations 509 Microfinance in General Equilibrium 516 Partial vs. General Equilibrium 516 Distribution of Weifare Gains from Microfinance 521 Extensions 522 Small Open Economy 523 Market Labor Shock 524 Large-Scale Sector 526 Concluding Remarks 527
Contents xxxxi 16. Study on the impact of Microfinance Institutions on Development -. '533 Introduction 533 The idea of Microfinance Institutions 534 Theoretical implications of the benefits of Microfinance Institutions 535 A Game-Theoretical Approach to Group-Lending 535 Saving Traps in Macroeconomic Growth Models 540 From Macro-to Macroeconomic Levels 542 Empirical Analyses 543 Mix Market Data Base 543 Description of Mix Market Variables 543 Choice of Microfinance Institutions in Different Geographie Regions 544 Descriptive Analysis 545 Basic Economic Condtions in selected African Countries 545 Microfinance Institutions in selected Afrcian Countries 547 Basic Economic Condtions in selected Asian Countries 551 Microfinance Institutions in selected Asian Countries 552 Econometric Analysis 555 Discussion of Appropriate Response Variables 556 Discussion of Relevant Explanatory Variables 558 Statistical Regression Analysis by Ordinary Least Squares 561 Empirical Results 564 Caveats 572 Alternative Approaches to Emprical Analyses 574 A Fixed-Effects Model as Panel Design 574 Ideas for a Binary Choice Approach 575 Conclusion 576
xxxxii Microfinance: A Platform for Social Change 17. A Model of a Microcredit Institution: Break-Even Anaylsis, Borrowing Group Creditworthiness and Risk Analysis 581 Introduction 581 History of Microcredit 585 Role of Grameen Bank 585 Women's Empowerment 586 What is a Self-Help Group (SHG)? 586 Loan Schemes 587 Loan Repayment 587 Types of costs associated 587 Target Group & Organization Building (A proposed model) 588 Viability and Break-even Analysis 589 Borrowing Group Creditworthiness 590 Risk Analysis 591 Conclusions 592 18. Efficiency and Sustainability of Micro Finance Institutions in South Asia 595 Introduction 595 Review of Microfinance in South Asia 597 Best Practice Function and the Concept of Efficiency 601 Methodological Framework 604 Analytical Model 606 Selection of Inputs and Outputs 607 Efficiency Analysis 608 Analysis of Efficiency Determinante 618 Concluding Remarks 623 19. Mathematical Models For Microlending 635 Introduction 635 Description of the Model 635 Computing the expected total discounted return 637 Condition of Absence of Strategie Default (ASD) 640 Conclusions 642