SUSTAINABILITY OF SELF-EMPLOYMENT THROUGH MICROFINANCE: AN INNOVATIVE SERVICE APPROACH OF FINANCIAL INSTITUTIONS Dr. SUNITA MALHOTRA * PREM MALHOTRA ** *Assistant Professor, Department of Management, Dayalbagh Educational Institute (DEI), Agra. **Lecturer, Department of Humanities Anand Engineering College, SGI, Keetham, Agra. ABSTRACT The Unemployment problem is spreading in all developing countries very rapidly and due to this reason, poverty lies in these countries. Microfinance as a tool of poverty removal is working in this regard and trying to reduce the problem of poverty. This paper makes an attempt to show the impact of microfinance on poverty reduction by providing self-employment to poor. For this purpose the relationship between the borrowed money from MFI and actual amount of money invested in business or used for self-employment purpose has been analyzed by considering the effect of training & guidance received from microfinance institutions on the growth and success of self-employment. To analyze the sustainability of selfemployment through microfinance, a primary survey will be conducted with the beneficiaries of MFIs and Financial Institutions. With the help of responses collected through beneficiaries, sustainability of self-employment will be measured. Till time number of researches done on the issues like impact of microfinance on poverty removal, women empowerment through microfinance, Governance issues, etc. but no research has measured sustainability of self-employment. The possible outcomes of this paper would be: 1. Development of a model of Microfinance responsiveness toward poverty elimination and selfemployment generation. 2. Satisfied microfinance providers and beneficiaries after filling their gaps of service distribution and receipts. 3. To explore the possibilities to use microfinance as a tool to stimulate self-employment & thereby reduce unemployment & increase social security 4. To find out the sustainability of self-employment through microfinance. The proposed research methodology for this paper is: data will be collected through primary and secondary both sources, where primary sources will be microfinance providers (NGOs, MFIs, FIs) and their beneficiaries. Key words: Microfinance, Self-employment, Sustainability, training & guidance INTRODUCTION "Microfinance is the supply of loans, savings, and other basic financial services to the poor."(cgap) The most important finding in the last two decades in the world of finance did not come from the world of the rich or the relatively well-off. It is from those who belong to poor income group. This is based on the concept that the poor can save, can borrow (can indeed decide on loans to fellow poor), and will certainly repay loans. This is the world of microfinance. Today s market driven economy has re-defined the financial sector in India. As India is a developing country and have a huge population living below 79 admin@icmrr.org
poverty line, and to promote these people economically, in India microfinance has taken a step ahead. Due to the positive side of this effort number of people has improved financially a lot. Microfinance is not a new phenomenon. Its origin can be traced back to 1976, when Muhammad Yunus set up the Grameen Bank, as experiment, on the periphery of Chittagong University campus in the village of Jobra, Bangladesh. Since then several microfinance institution came up with the idea to serve and fulfill the needs of poor people. These institutions have succeeded in reaching the poorest of the poor, and have launched new strategies for the fulfillment of their dream. These institutions have started the stipulation of collateral free loans to poor people, especially in rural areas, at heavy interest rates that are repayable in frequent installments. Borrowers are organized into groups and peer pressure among them, which reduced the risk of default. Microfinance is now being considered as one of the most important and effective tool for poverty alleviation. It is also very effective in terms of health care, education, legal rights, sanitation and other living standard markups. Microfinance is helpful in providing opportunities to the general and poor public for self-employment. And it is very important and this is the right time to check that these microfinance institutions are able to provide financial help in such a way so that poor people are able to start their own business and also able to sustain them effectively. Sustainability is a measurement parameter of success rate of microfinance institutions in achieving their objectives. OBJECTIVES OF THE STUDY In the light of the research topic, the objective of this study is to show how microfinance works for eliminating poverty and how it sustains the services offered by the microfinance providers in the terms of its sustainability. The main objectives of this research paper are as follows: 1. To measure the impact of microfinance on self-employment 2. To find out the sustainability of self-employment through microfinance 3. To find out the gaps between microfinance providers and beneficiaries 4. To open new areas for further research. LITERATURE REVIEW Hulme and Mosley (1996) state that microfinance projects can reduce the isolation of women as when they come together in groups they have an opportunity to share information and discuss ideas and develop a bond that wasn t there previously. Dichter (2006) finds that microfinance has often been used to cover basic consumption needs rather than fuel enterprise. In the face of such evidence, the microfinance sector now portrays consumption smoothing as a new argument for microfinance (see Collins et al., 2009).Otero (1999) The aim of microfinance according to is not just about providing capital to the poor to combat poverty on an individual level, it also has a role at an institutional level. It seeks to create institutions that deliver financial services to the poor, who are continuously ignored by the formal banking sector. There is no doubt that sustainability is also very important from clients perspectives, as they place a high value on continued access to credit, and if they feel that the MFI will not survive it reduces their incentive to repay loans (Von Pischke, 1999). Madeline Klinkhamer (2000) shows that the lack of paper title should not preclude microlending for housing purposes, particularly for shorter term, smaller loans. In fact, the onerous process of foreclosure14 is prohibitive for MFIs to enforce even in the presence of clear titles. Schreiner and Colombet (2001) define microfinance as the attempt to improve access to small deposits and small loans 80 admin@icmrr.org
for poor households neglected by banks. Therefore, microfinance involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from the formal financial sector.mfis have more than just a social mission. Markowski (2002, p.117) states they have a dual mission: a social mission to provide financial services to large numbers of low-income persons to improve their welfare, and a commercial mission to provide those financial services in a financially viable manner. We have already seen that MFIs are not fulfilling their social mission to the extent needed to meet the demands of the poor for financial services. Simanowitz with Walter (2002) argue that microfinance is a compromise between this social mission and commercial mission. As there is more emphasis on financial and institutional performance, opportunities for maximising poverty impact and depth of outreach have been compromised. They call for a balancing of social and financial/commercial objectives because the current focus on financial objectives means fewer of those most in need of microfinance services are being targeted. To do this they argue it is now time to innovate and design services that maintain high standards of financial performance, but which set new standards in poverty impact. Markowski (2002) states that CGAP estimates that only about 5% of MFIs worldwide are financially sustainable while the IMF (2005) puts the figure at only 1%, so this is a huge issue for the microfinance sector. To achieve financial sustainability according to Havers (1996), an MFI must cover the cost of funds, operating costs, loan write-offs and inflation with the income it receives from fees and interest. Littlefield, Murduch and Hashemi (2003) refer to a study of 62 MFIs that have reached full financial self-sufficiency with 18 MFIs that targeted what they defined as the poorest clients averaging better profitability than the others. This shows that when properly managed, programmes that target the very poor can become financially sustainable. Zohir and Matin (2004) state that many MFI loans are used for agricultural production, trading, processing and transport, resulting in an increase in the use of agricultural inputs and increased output of agricultural production. This leads to enhanced employment opportunities in these sectors for the wider community and a reduction in the prices of such produce due to increased supply. According to the IMF (2005) the MFIs that have become self-sustainable tend to be larger and more efficient. They also tend not to target the very poor, as targeting the less poor leads to increases in loan size and improved efficiency indicators, whereas MFIs focusing on the poorest tend to remain dependent on donor funds (IMF, 2005). This is where the compromise exists. In order to achieve such sustainability, while at the same time reaching those most in need, microfinance programmes need to be managed in a rigorous and professional manner, subsidises must be removed, and tight credit control procedures and follow-up on defaulters needs to be in place Tucker, Michae (2005) Microfinance Institutions in Transition: Fonkoze in Haiti Moves toward Regulated Banking Status Microfinance institutions (MFIs) established to provide the poor with access to capital have typically operated outside of their countries' regulated banking environments. Vinod Khosla & Vikram Gandhi,(2006) Microfinance is powerful, but it is clearly no panacea. Our experience in the business world has taught us that solutions marketed as cure-alls to complex societal problems rarely if ever pan out as promised. Microfinance does not directly address some structural problems facing Indian society and the economy, and it is not yet as efficient as it will be when economies of scale are realized and a more supportive policy environment is created. Loan products are still too inflexible, and savings and insurance services that the poor also need are not widely available due to regulatory barriers. Valerie Rozycki (May 2006) Credit Information Systems for Microfinance in India Developing solutions to manage anticipated boom in sector growth Microfinance services (predominantly the disbursement of very small loans to the poorest sectors of society) have 81 admin@icmrr.org
expanded rapidly over the past three decades and have much potential to affect grass-roots economic development. However, without proper information sharing systems in place, maturing microfinance sectors often operate sub-optimally. Cheryl Young (November 2007)Housing Microfinance: Designing a Product for the Rural Poor microfinance, hard collateral is not a necessary prerequisite for lending. In India, theself Help Group (SHG) model predominates, which utilizes group guarantees, exercising peer pressure and character assessment to mitigate risk of non-repayment.mitali Sen (2008), Microfinance holds a big promise to generate income and employment and alleviate poverty in the developing countries. The Microfinance Institutions (MFIs) are financial institutions with a primary objective of making credit available to that segment of the population, which has been ignored by the commercial banking system for not having collateral requirements. The efficient functioning of these MFIs on a sustainable basis is important but for MFIs it is equally important that people at or below the poverty line are reached, quality services are provided, and that microfinance improves clients lives. CONCEPTUAL MODEL RESEARCH MODEL Sustainability of self employment Borrow money from MFI Amount of money invested in business Training & guidance provided The above research model can be written in the mathematical form as-: SE c,t = α 0 + β 1 BMFI c,t + β 2 TAG c,t + β 3 AMIB c,t + β 4 SSE c,t + є c,t ----------------------(1) Self Employment The above given mathematical equation has the following interpretation which is given in Table 4.8 below. Symbols α Є C t BMFI TAG AMIB SSE Symbols and their meanings of mathematical model Meanings Constant Model error Respondent Finance at particular time Borrow money from MFI Training and Guidance provided Amount of money invested in business Sustainability of self employment 82 admin@icmrr.org
Hypothesis INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW H 1 : There is no relationship between borrowed money from MFIs and Self-employment H 2 : There is no relationship between the training and guidance provided by MFIs and Selfemployment H 3 : There is no relation between proportion of borrowed funds invested in business and selfemployment H4: There is no relationship between sustainability of self employment and microfinance funding Procedure The data collected by means of well developed, adopted scale having four sub-parts. All of the questionnaires were distributed among the respondents in the area of M.P. (Gwalior, Murena, Datia, Dabra) and U.P. (Agra, Firozabad, Mainpuri) and other nearby areas. Total 200questionnaires were distributed but only 186 questionnaires were returned. The responses of questionnaire were fed into the statistical packages of social sciences (SPSS) version 16 for analysis and evaluation. Multiple regression analysis was used as a statistical test to determine the degree of relationship between the variables involved in this study. Result and Analysis The table 1.1 shows the result extracted on the basis of multiple regression to find the association between independent variables and dependent variable. The mathematical model of equation 1 has been modified as; SE c,t = α 0 + β 1 BMFI c,t - β 2 TAG c,t - β 3 AMIB c,t - β4sse c,t + є c,t ------------------(2) Table 1.1 (Beta Coefficients, standard errors in parenthesis t-values in bracket and p-value in italics) Table: 1.1 Constants BMFI AMIB TAG SSE 3.452 (0.555) [6.219] 0.160 (0.078) [2.062] 0.161 (0.076) [2.132] 0.169 (0.108) [1.564] 0.164 (0.112) [1.587] R Square F Statistics 0.049 3.400 0.000 0.041 0.034 0.119 0.133 Result of H2 H1 H3 H4 Hypothesis Accepte Accepted Rejected Rejected testing d Legend: Constant::Self Employment BMFI : Borrowed money from MFI TAG : Training and Guidance provided by MFIs AMIB : Proportion of borrowed fund Invested in business SSE : Sustainability of self employment - - 83 admin@icmrr.org
The above mathematical model and table 1.1 shows that hypothesis 3 & 4are rejected on the basis of their weak association among the variables (p>0.05). Hypothesis 1 and 2 is accepted on the ground ofstrong relationship between the dependent and independent variables (p<0.05). Here we found that there is positive significant impact of these independent variable on the dependent variable (F=3.400) (p<0.05). Result Analysis Reasonable interest rate of microcredit and operational assistance provided by MFIs shows strong association with beneficiaries (p<0.05) while sustainability of self employment with microfinance funding and training and guidance provided by MFI shows weak association with beneficiaries(p>0.05). This result indicates that beneficiaries are not bothered about the interest rates charged by the MFIs but they are more satisfied with the easy procedure of collecting loan. As the interest rates are very high in comparison of other sources of borrowed funds than also people prefer MFIs because of other benefits involved with it. Even people are not concerned much with the other assistance provided by MFIs to run their businesses. People are more interested in financial assistance provided by the MFIs and from this service, the results shows that they are very satisfied. The another reason why beneficiaries are more satisfied with the procedure of getting loan as the earlier studies says MFIs involve less formalities in comparison of banks and other financial institutions. The amount of loan is also very variable in nature as people can borrow funds with very small amount like Rs. 1,000 which is generally not possible in case of banks and other sources of borrowed funds. Secondly, there is weak association of sustainability of self employment with beneficiary and training and guidance with beneficiary. Hence the beneficiary are not sustain their business and self employment for longer period ie more than 3 years due to their weak association of training and guidance,shown in above table. For improving the sustainability of self employment there should be a frame work or mechanism wherein the strong emphasis on training and guidance for beneficiary Conclusion The result of this research study clearly indicates that there is weak relationship between the sustainability of self employment with microfinance funding. MFIs shows the strong relationship with self employment hence it is accepted. The rejection of third hypothesis clearly shows that the training and guidance provided by MFIs is not very helpful in running their businesses successfully. There is lack of motivation and attitude among the beneficiaries. Here in this research study we found that MFIs are fulfilling their objectives by serving the poor people in different manners. References 1. Adams, Dale W., Douglas H. Graham & J. D. Von Pischke (eds.). (1984), Undermining Rural Development with Cheap Credit. Westview Press, Boulder & London 2. Agion, Beatriz A. de; Morduch, J. (2003), Microfinance, Where do we Stand?, the British Association for the Advancement of Science Meetings, University of Salford, UK 3. Barr, Michael S. (2005), Microfinance and Financial Development, The John M. Olin Centre for Law & Economics Working Paper Series, University of Michigan Law School 84 admin@icmrr.org
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