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Innovations in Microfinance - Looking beyond Income Poverty

Article  in  SSRN Electronic Journal · April 2009

DOI: 10.2139/ssrn.1392623

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 1

INNOVATIONS IN MICROFINANCE – LOOKING BEYOND

INCOME POVERTY
- V. Basil Hans1
Abstract
Microfinance is one of the products of new developmental thinking and policy-making. It is a
unique amalgamation of industrial (including financial) and institutional reforms in the
present scenario of development economics. For the developing countries like India it has
come as a breakthrough in the philosophy and practices of poverty eradication, economic
empowerment and inclusive growth. Yet given the enormity of economic compulsions and
complexities in these countries, microfinance is an unfinished agenda. The main objective
of this paper, therefore, is to shift the focus from mere financial access to poverty
eradication and people’s empowerment, sifting the ‘performance’ of Microfinance
Institutions (MFIs) from their ‘popularity’.
The typical microfinance clients are low-income persons who do not have access to
formal financial institutions. Therefore, there is a tendency among development thinkers
and practioners to gauge the impact of MFIs purely in monetary terms, i.e. eradication of
income poverty. This is not only a partial view of the potential and purpose of microfinance
but also a cause of unbridled growth of MFIs. MFIs have the capacity and responsibility of
empower the most vulnerable, such as women, rural artisans etc; to allow the not-yet-
economically-active to become so; and to create community-based structures that build
mutual support and trust. The argument in this paper is that MFIs by releasing the true
potential of its members through social intermediation can ensure building an inclusive
society. MFIs have the advantage of combining the good features of both formal and
informal credit, even improving productivity and credit-worthiness through the ethics of
repayment. The plight of farmers in India and the scenario of suicides need to be examined
in this context.
For microfinance, therefore there is ethical and economic justification for looking
beyond income poverty or to move from financial intermediation to social intermediation. So
today we need to not only evolve new products or services under the gamut of microfinance
but also explore new frontiers of development, social and economic. This hinges on human
development in terms of infrastructure for health, education, skill and enterprise. This is also
in-keeping with the Millennium Development Goals (MDGs).
The positive signs are already visible. Several MFIs have recognised the need to be
socially relevant and active in order to be commercially viable and useful. The Kalinjiam
success story is a case in the point. This paper calls for a symbiotic relationship between
financial intermediation and social intermediation, to remove the economic and socio-
cultural barriers to empowerment, inclusion and development. Inclusive growth requires not
only physical, natural and human capital, but also social capital. Also further research is
need to a have a reality check of ‘what is really happening’, uniquely exploring both social
and financial performance in the MFI sector in general and Self-Help Group (SHG)
movement in particular.
--------------------

Keywords: financial inclusion, microfinance, poverty, social intermediation

JEL Classification: G2

1
Dr. V. Basil Hans is Professor & Head of the Department of Economics and Dean, Faculty of Arts, St
Aloysius Evening College, Mangalore – 575 003, Karnataka State, India. Email: vbasilhans@yahoo.com

Electronic copy available at: http://ssrn.com/abstract=1392623

 2

1. Introduction
The strength of microfinance (MF) has never been so keenly assessed than now. Its
potential and limitations need to be examined – theoretically and practically – not
just as an additional tool of credit for poverty eradication but also as a strategy of
building social capital in the country. It is in this backdrop that the present paper
assumes significance.
Microfinance (MF) is the product of new thinking and practice in development
economics. Microfinance movement is nothing short of a revolution in
developmental finance (Hans, n.d.). For the developing countries like India it has
come as a breakthrough in the philosophy and practices of poverty eradication,
economic empowerment and inclusive growth. At present there are more than 1000
microfinance institutions (MFIs) in India. Their role is nobler as they do “banking for
the poor”. They have also contributed to monetary liquidity and stability in the
economy. But we need to re-examine their role and performance not only in terms
of the avowed objective of poverty eradication but also in terms of the goal of
human development. They need to testify their functionality and performance in the
realm of social capital. They need to justify their presence and functions for socio-
cultural development of the country and how they can do this through social
intermediation. The objective of this paper, therefore, is to explore the possibility of
a symbiotic relationship between financial intermediation and social intermediation,
to remove the economic and socio-cultural barriers to empowerment and
development.

2. Microfinance: Theoretical and Pragmatic Insights

The distinction between microfinance and micro credit has to be underlined.
Specifically, microfinance refers to loans, savings, insurance, transfer services and
other financial products targeted at low-income clients whereas micro credit refers
to a small loan to a client made by a bank or other institution. Micro credit can be
offered, often without collateral, to an individual or through group lending. Christen
et. al. (1984) have viewed the microfinance movement as an environment in which
as many poor and near-poor households as possible have permanent access to an

Electronic copy available at: http://ssrn.com/abstract=1392623

 3

appropriate range of high quality financial services, including not just credit but also
savings, insurance, and fund transfers. It is thus the provision of a board range of
financial services such as deposits, loans, payment services, money transfers and
insurance to poor and low income households and their micro enterprises (Sriram
and Kumar, 2007).
The typical microfinance clients are low-income persons that do not have
access to formal financial institutions. Microfinance clients are typically self-
employed, often household-based entrepreneurs. In rural areas, they are usually
small farmers and others who are engaged in small income-generating activities
such as food processing and petty trade. In urban areas, microfinance activities are
more diverse and include shopkeepers, service providers, artisans, street vendors,
etc. Microfinance clients are poor and vulnerable non-poor who have a relatively
stable source of income (the Microfinance Gateway).
In the most simple terms, microfinance is “banking for the poor” and covers
micro credit, micro savings, micro insurance and remittances (Kandelwala, 2007).
Asian Development bank defines Microfinance as the provision of a broad range of
financial services such as deposits, loans, payment services, money transfers, and
insurance to poor and low-income households and, their micro enterprises (ADB,
2000). Ledgerwood defines microfinance as the provision of financial services like
savings, credit, insurance and payment services to low-income clients, including the
self-employed (Ledgerwood, 1999). Even the World Bank feels that the poor, i.e.
the target clients of microfinance, need and use more financial services than just
micro loans. In a situation financial crisis or financial market failure compounded by
moral hazard, the MFIs come in handy. MFIs overcome financial market
imperfections through group lending practices in which borrower’s associates
become co-signers to the loan. The numerous mechanisms of a MFI facilitate
effective credit provision. The MFIs are able to offer non-credit financial services
such as savings arrangements to poor people. BURO Tangil of Bangladesh uses a
unique saving product called “Contractual Savings Agreement”. Similarly Kenya has
developed the “Jijenge Savings Account” and the Commercial Bank of Africa has
 4

provided the facility of mobile subscribers making micro payments (Goldin and
Reinert, 2006; Ramamurti, 2007).
In India the recent Task Force on Microfinance has defined microfinance as
the “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. In the Indian context terms like
"small and marginal farmers", "rural artisans" and "economically weaker sections"
have been used to broadly define micro-finance customers (Basix, 2000;
Khandelwal, 2007).
Microfinance is a well-suited financial service for the micro entrepreneurs
helping them in running and expanding business. These definitions not only indicate
the scope of microfinance per se but also point out the need to balance the social
objectives with the financial objectives of microfinance. In fact the latter is really
challenging (DHAN Foundation, 2003).
Many MFIs are moving in the direction of commercialisation, specifically
since 2001. The difficult challenge in making the transition is not losing sight of the
central mission of serving poor populations. Admittedly there is a tension between
commercialisation and “mission drift”. This is seen in case of BURO Tangil
(Bangladesh) and Bank Rakyat’s Micro-business Division in Indonesia. Although the
process of transition is a difficult one those MFIs that make the transition will have
contributed significantly to the design of poverty-alleviating finance, no small
achievement (Goldin and Reinert, 2006). Looking beyond income poverty then
becomes meaningful. Human poverty, capability poverty, gender inequity etc are
the new concepts in the literature of poverty. These concepts have much to with
sustainable development than just livelihood finance. While income poverty can be
tackled by direct loans, the other forms of poverty need different approaches and
mechanisms. For example, if a woman feels or is being treated a subordinate or
inferior to man it is a bias and a form of poverty. Biases in development manifest
themselves in inequalities (of opportunities, responsibilities and returns),
discrimination (from social, cultural, political and economic perspectives), and
deprivation (of rights, status, dignity and justice) (Hans, 2008).
 5

Looking beyond income poverty entails going beyond micro credit. Provision
of savings, insurance and investment for businesses takes finance and financial
activities to the branches of economics other than consumption. There is all the
reason for MFIs to graduate as institutions of socio-economic development. Social
intermediation can come naturally to them. In the emerging economies they have
immense scope of functionality for developing not only financial assets but also
physical and human assets. Human needs, interactions and interrelationships,
infrastructural requirements are some of the orbits where they can operate with
ease in the larger interest of the society. While development of social capital is
required here demand-oriented as well as supply-driven MFIs both have handful of
jobs in these societies.

3. Microfinance and Financial Inclusion in India

Financial inclusion has been discussed in recent years, particularly in banking

circles with the main objective of delivering affordable banking services to the
disadvantaged sections of the society, i.e. clients who belong to the unorganised
segments of the economy and per force have to depend upon non-institutional
sources of finance (Rao, 2007; Rangarajan, 2007; Ray and Singh, 2006). Financial
exclusion is substantiated by the fact that as per the World Bank estimate in 1995,
in most developing countries the formal financial system reaches only the top 25 per
cent of the economically active population (Sinha, 2004). Microfinance is expected
to be an answer to deprivation and financial exclusion. This is the new development
(finance) paradigm.
How and why is microfinance a tool for financial inclusion in India?
Conventionally traders and moneylenders have traditionally provided credit to the
rural poor. The creditor-borrower dichotomy is sharp and often cruel under the
traditional system. Loans were usually made at exorbitant rates of interest leading
to considerable hardship and impoverishment of borrowers, including undesirable
and illegal practices like ‘begar’ (bonded labour). What we refer to as microfinance
today does not include such exploitative practices, but rather lending to the poor at
reasonable but sustainable rates. Moreover in the microfinance system there is the
 6

element of cooperation. The pioneer and mainstream institutions involved in

providing microfinance in India have been the cooperatives, followed by the
Regional Rural Banks (RRBs), the National Bank for Agriculture and Rural
Development (NABARD), the Small Industries Development Bank of India (SIDBI),
and the Housing Development Finance Corporation (HDFC). Later the NGOs such
as self-help groups (SHGs) and the Non Banking Finance Companies (NBFCs)
entered the arena.
The idea of financial inclusion was in-built into group-lending system much
before the term became popular. Ela Bhatt established the Self-Employed Women's
Association (SEWA) in 1972. It was to bring poor women together and give them
ways to fight for their rights and earn better livings. Its membership grew to 7000
members in 1975 and to over now 700,000 now. The SEWA Cooperative Bank has
$1.5 million in working capital and more than 30,000 depositors with a loan return
rate of 94 per cent. SEWA's efforts to increase the bargaining power, economic
opportunities, health security, legal representation, and organisational abilities of
Indian women have brought dramatic improvements to hundreds of thousands of
lives and influenced similar initiatives around the globe (Ramakrishnan, 2007). The
rapid growth and finer success of SHGs has given a fillip to all-round development
of its members. They deserved to be called as revolutionary institutions in inclusive
growth. Revolution in terms of reach and diversity of products/services is a unique
feature and contribution of microfinance. The new frontiers of microfinance (or new
products or services in a limited sense) include social security plans such as health
and life insurances, pension etc. Many MFIs have recognised the need to be
socially relevant and active in order to be commercially viable and useful.
Having less means or low income is only one aspect of poverty; the other
aspects are uncertainties and irregularities in income streams available and low
accessibility to credit and investments. The MFIs have not simply come to the
rescue of people in dire need of money but have also made poor people ‘bankable’
and ‘viable’. Interestingly this has worked as a remedy for (i) unproductive
borrowing, and (ii) heavy overdue. In these days of globalisation, liberalisation and
`reforms', where profitability and `viability' of operations are the only considerations,
 7

microfinance is proving itself to be a successful phenomenon. . How else would one

explain the case of private commercial banks willingness to support micro-credit
operations of NBFCs such as Share Microfin and Basix among others? Diversity
and viability are now the “added criteria” for profitability, financially and otherwise.
Two MFIs can be quoted as examples here: One, the Kalanjiam Initiative in Tamil
Nadu and the DWCRA in Andhra Pradesh. Under the Kalanjiam Community
Banking Programme (KCBP) promoted by DHAN Foundation, Federations existing
for more than three years have initiated many social development programmes –
housing, infrastructure, health, education, sanitation, drinking water, skill building,
insurance and business promotion. Its achievements in accessibility of credit and
basic infrastructure, (computer aided)-education, (online)-resource consultancy,
employment assistance, gender issues, leadership development etc., has been
commendable. The DWCRA has been appreciated by the likes of Bill Clinton and
Kofi Annan. The scheme which was started with 15 women with each contributing
one rupee a day has grown to a corpus of $180 million in a short time. In many case
the clients of MFIs have become computer literate and internet savvy. The have
come to accept technology for financial inclusion

4. Innovations in Microfinance

Democratisation and decentralisation in decision-making have given a boost

to local participation. Members are using the modern tools and techniques like
smartcards, financial management, environmental management, disaster
management (as was witnessed during the Tsunami) etc. The MFIs have moved
from financial security to social security. The new instrument is social
intermediation. Increasing attention in recent years has been paid to the ways in
which microfinance fosters social capital formation among the poor (ABN-AMRO;
World Bank, 1999).
Through social intermediation MFIs can ensure a certain minimum of social
capital in the first phase of economic growth, and enhance its quantity and quality
subsequently and sequentially. Social intermediation is the process which combines
the functions of social organisation and financial linkage carried out through an
 8

NGO, or local government organisation, though self-help groups or through

individuals, as locally appropriate (Hulme and Paul, 1996).
In India the self-help group (SHG) movement is seeking to provide social
intermediation through the Rashtriya Mahila Kosh (RMK) and Women’s
Development Corporations, howsoever small they are compared to the erstwhile
Integrated Rural Development Programme (IRDP). Using ‘trust’ as the base the
MFIs have been able to foster group cohesiveness through networking. The
benefits of networking also include low cost marketing, knowledge diffusion, easy
access to timely health care etc. Social intermediation through a range of activities
and capacity-building has enabled people to become good borrowers and savers,
better manage their own finances or their own financial groups and helped them to
put whatever ‘social capital’ they have to more productive use. No doubt such an
intervention is not likely to be financially self-sustainable. This gives a new
responsibility to the banker too (as in the case of SHG-Bank Linkages). But the
banker must accept that this is a role which the NGO, as a committed social
engineer, is better suited to execute. Social engineering is a full-time activity which
has no substitute for the limited community contacts that a committed banker might
indulge in. The Microfinancial Sector (Development and Regulation) Bill, 2007 with
all its legal aspects aims to ensure that NGOs use their social mediation skills to
ensure financial intermediation (Shylendra, 2007). What is needed, however, is to
explore the two-way relationship between financial intermediation and social
intermediation before making any alterations to the prevailing structure of
microfinance. After all unrestrained access to public goods and services is the sine
qua non for an open and efficient society (Ray and Singh, 2006). Today the MFIs
want the government to empower them for mobilising savings. With increasing
demand for rural finance, and the inadequacies of formal sources, the MFIs have
immense opportunities in the new avatar of micro credit in India. However, in the
light of recent experiences, and the need for qualitative growth, MFIs should be
managed with better scrutiny in terms of finance and technology as well as social
responsibility. This is of utmost importance in order to upgrade MFIs from thrift and
 9

credit institutions to capacity-building and livelihood-sustaining associations of

people (Dinesha, et.al., 2008).
Client-specific and role-specific MFIs can do a lot in enabling people; reach
the realm of inclusive growth. Such tasks should be taken up with a knowledge that
social exclusion is something that cannot be solved through reservations, subsidies
and grants only. A balance between physical growth, social growth and cultural
growth should be maintained, always (Hans, 2009).

5. Conclusion

While MFIs continue to be the core institutions offering financial services to low
income populations, they have been proactive in the process of inclusive growth in
India by their innovative approaches. They have moved with the times. They are
changing for the better. By providing an array of financial and social services and
helping the members practise repayment ethics and social cohesion they can be
panacea for rural poverty and backwardness. They have immense potential not only
as a system of peer-to peer (p2p) lending but also as an avenue of social bonding
This is not to say that the MFIs have overcome all the social barriers (including that
of caste) in their intervention strategies. Their real success will depend on the
potential, reach and transparency, both from the financial side and from the social
side. Accessibility, accountability and sustainability in all their operations will help
the MFIs to lift themselves as social engineers, effectively. The country needs this
for achieving faster and more inclusive growth. Individuals and intuitions can and
should look beyond income poverty. The Kalanjiam and the DWCRA have shown
what microfinance can do besides eradiating income poverty. Success stories like
these can be lessons for others. A symbiotic relationship between financial
intermediation and social intermediation is possible and profitable even while
dealing with the vulnerable. It makes us also realise that economic integration and
social integration are required to fight poverty and its attendant evils; this is new
growth. This realisation should not be forgotten even as microfinance has passed
from the phase of cooperative movement (1900-1969) to commercialisation phase
 10

(2000) (SAMN). Happily India has now acquired an “access to growth” agenda. It is
India’s unfinished agenda (Hans, 2008b).
 11

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