Posted at 11.28.2018
Microfinance can be a critical element of a powerful poverty reduction strategy especially for developing countries. The services provided by microfinance institutions can enable the poor to smoothen their consumption, manage their risks better, build their assets gradually, develop their micro enterprises, enhance their income earning capacity, and revel in an improved quality of life. This paper examined the extent to which Microfinance Institutions (MFIs) donate to poverty reduction in Haryana. Following a information collected from both microfinance institutions and their clients, it was revealed that MFIs have changed the life of poor people in a confident way. MFIs' clients have increased their incomes, capital invested and for that reason expansion with their businesses. Despite these achievements it was further observed that some conditions like grace period for loan repayment, collateral and MFIs coverage have been limiting factors for poor people to gain access to the MFI services.
Key words: Microfinance Institutions, Micro and Small Enterprises, Poverty Reduction
Microfinance can be considered a critical component of an effective poverty reduction strategy. Improved access and efficient provision of savings, credit, and insurance facilities in particular can enable the poor to smooth their consumption, manage their risks better, slowly but surely build their asset base, develop their micro enterprises, improve their income earning capacity, and enjoy an improved standard of living. Researchers argue that the Microfinance Institutions (MFIs) are of help as they
i) reduce poverty through increased income and standards of living;
ii) empower women;
iii) develop the business sector through growth potentials, and
iv) create a parallel financial sector.
It is normally accepted that without long term access to institutional microfinance, most poor households would continue to rely on meagre self-finance or informal sources of microfinance, which limits their ability to actively participate and reap the benefits of development opportunities.
The proponents of credit approach argue that people who reside in developing countries might enhance their living standards by becoming micro entrepreneurs and this finance institutions should support their initiatives with small loans. This is true because more developed and sustainable micro and small enterprises in many societies contribute to the growth of national income, more employment opportunities, better standard of living and hence to the reduction of poverty. However, in line with the International Finance Corporation, 60% to 69% of the population in many countries haven't any access to conventional financial institutions.
Due to the decline of the general public sector, the role of Micro and Small Enterprise (MSEs) to advertise economical growth and development, offering increased employment and reducing income disparities has been widely recognised. In Haryana, Micro and Small Enterprises contribute 12% and 34% of rural and urban employment respectively as well as up to 32% of the GDP.
The increased participation and contribution of MSEs has led to an increased dependence on financial services. Credit has been recognised among the tools for promoting the introduction of MSEs. Loans enable the average person member or enterprise to take pleasure from both great things about economies of scale and those of new high-value technology.
Recognising the importance of financial services to MSEs, during 2000 the government of Haryana developed the National Microfinance Policy good overall financial reforms initiated in 1999. The policy aims at enabling low-income earners to access financial services. Microfinance Institutions (MFIs) have became alternative sources for financing MSEs in place of Formal FINANCE INSTITUTIONS (FFIs), which regarded MSEs as too poor to save lots of, having low borrowings and carrying a default risk. The policy further aims at raising the income of both households and enterprises, by facilitating savings, payments, and insurance and credit services.
Despite the recognition of the dynamic role of credit to small enterprises, few companies and the indegent in rural Haryana have access to, and reap the benefits of, the available financial services. MFIs activities remain centred around cities. Operational performance demonstrates low loan payment rates and the capital structure reveals a higher reliance on donor or government funding.
Microfinance is the provision of a wide selection of financial services such as deposits, loans, payment services, money transfer, and insurance to poor and low-income households and their micro enterprises. Microfinance does not only cover financial services but also non-financial assistance such as training and business advice. The main providers of financial services to the indegent and low income households in the rural and cities of Haryana consist of accredited commercial banks, regional and rural unit banks; savings and credit cooperative societies; and many NGOs whose micro-credit delivery operations are funded and supported with technical assistance by international donors.
There is a wide range of definitions for MSEs, but for the goal of this study, a MSE is thought as a productive activity either to create or distribute goods and or services, mostly undertaken in the informal sector. An average micro enterprise employs less than five workers, usually members of the family and has not a lot of fixed assets. A little enterprise on the other hand, employs more than five personnel and almost all of them are in a formal sector with much higher fixed assets compared to micro enterprise. According to the Small and Medium Enterprises Development Policy, small enterprises are formal undertakings engaging between 5 and 49 employees, or with capital investment which range from 5 million to 20 million.
Poverty at its broadest level can be conceived as circumstances of deprivation prohibitive of decent human life. That is caused by lack of resources and functions to obtain basic human needs as observed in many, but often mutually reinforcing parameters such as malnutrition, ignorance, prevalence of diseases, squalid surroundings, high infant, child and maternal mortality, low life expectancy, low per capita income, poor quality housing, inadequate clothing, low technological utilization, environmental degradation, unemployment, rural-urban migration and poor communication. Poverty is caused by both internal and external factors. Whereas the inner causes can be clustered into economic, environmental and social factors, the external causes relate to international trade, your debt burden and the refugee problem.
Microfinance in Haryana is one of the approaches that the government has focused its attention in recent years in search of its long-term vision of providing sustainable financial services to most Haryana population. In Haryana, before the current financial and banking restructuring took place, almost all of financial services for rural, micro and small enterprises were provided by the National Bank of Commerce (NBC) and the Co-operative and Rural Development Bank (CRDB).
Since 1991, the government has been implementing financial sector reforms aimed at investing in place a competitive, efficient and effective economic climate. Even though reforms have had reasonable success in bringing about the growth of competitive and efficient mainstream banking sector, it hasn't caused increased usage of basic financial services by a lot of the Haryana, particularly those in rural areas. The realization of the aforementioned shortcoming resulted in the Government's decision to initiate deliberate action to facilitate alternative approaches in the creation of a wide based economic climate comprising of a variety of sustainable institutions with wide outreach and offering diverse financial loans (ibid). The government's choice of microfinance was influenced by the conviction that, given sufficient attention, microfinance has the potential to contribute considerably to the financial development of the country because it is more adapted to the needs of the low-income population which makes up the majority of Haryana.
Studies on MFIs have been conducted in a variety of countries all over the world. The findings from these studies are of help to new researches on microfinance. Some of the studies, which had a substantial contribution, include the study by Mosley (2001). In his study on Microfinance and Poverty in Bolivia, Mosley assessed the impact of microfinance on poverty. The study was conducted through small sample surveys of four microfinance institutions, two urban and two rural, utilizing a range of poverty concepts such as income, asset holdings and diversity, and different measures of vulnerability.
All the institutions studied had on balance, positive impacts on income and asset levels, with income impacts correlating negatively with income on account of poor households choosing to invest in low-risk and low-return assets. This study revealed also that in comparison to other anti-poverty measures, microfinance is apparently successful and relatively cheap at reducing the poverty of those near to the poverty line. However this is also revealed to be ineffective, by comparison with labor-market and infrastructural measures, in reducing extreme poverty. The analysis further proposed actions that appear to be promising for the further reduction of poverty in Bolivia which can be helpful for other developing countries. These actions include more powerful efforts to mobilize rural savings, removal of lower limits on loan size, and the introduction of appropriate insurance mechanisms.
Despite this contribution, the study by Mosley has some weaknesses. The first problem is on the sample size which was only four microfinance institutions, this sample size may not be enough for the generalizations made above. Also the poverty concepts considered excluded the amount of employees, this is vital to measure, as it indicates if the microfinance institution has generated capacity to hire more people or not.
Hassan and Renteria-Guerrero made another empirical contribution in this area. In their work "The experience of the Grameen Bank (GB) of Bangladesh in community development", they examined the GB experience with a purpose of understanding the fundamental elements of its procedures and the factors that enabled GB to attain the poor. This study revealed that the GB has established its credentials as an institution that aims at providing credit to the landless and asset less poor in rural areas. GB credit provides recipients the power of entitlement to society's productive goods and services with immediate effect, unlike almost all of the other programmes for the poor that have a tendency to create the unintended negative aftereffect of dependency on the providers. However, it was observed the credit by itself is an insufficient factor to improve poverty conditions, and so the GB devotes a substantial amount of resources to the improvement of the social wellbeing of its members.
The GB uses an unambiguous eligibility criterion which ensures that only the poor or inadequate can participate. It motivates their clients to organize themselves into groups of five like-minded members. Each group elects one group leader among themselves. Every six groups form a "centre" which serves as the basic operating unit of the GB. It is at the centre that weekly meetings are conducted to openly discuss loan applications proposals and accept weekly repayments and compulsory savings deposits. While the loans are created to individual members, the group as a whole is expected to be accountable for the regular repayments of the loans of all their members. This form of grassroots organization not only promotes solidarity and participation among the list of members, at the group and centre levels, but also promotes mutual support and peer pressure to ensure that the loans are properly utilized and repayments made promptly. In concluding their work, Hassan and Renteria-Guerrero assert that the GB's approach appears to be a highly effective tool for rural poverty reduction despite minor criticism that has never given alternative solution for poverty alleviation. The programme supplies credit to increase the physical productive capacities of the poor and in addition, it provides the disadvantaged with human development inputs to boost their overall productive and living standards. The success of the GB is not free from the influence of external factors. To work and sustainable, a credit delivery system also requires a supportive national policy framework for this to remain autonomous and free from political influence. Even though this work was just an event and not a research work, we acclaim its contribution in the area of microfinance practices.
The design of the methodology because of this study was greatly influenced by the works by Mosley, Hassan and Renteria-Guerrer, Kuzilwaand Rweyemamu et al. Our research was executed in three stages. In the first stage, a pilot study was undertaken to pre-test the questionnaires. This is followed by a survey, and in the third stage a research study was undertaken. The study used both quantitative and qualitative data. Primary and secondary resources of data were also found in this study. For primary data generation, respondents were drawn from both MFIs and MFIs' customers. The respondents comprised MFIs' officers, owners/managers of enterprises financed by these MFIs and other stakeholders who in a single form or another are involved with microfinance and poverty reduction. The info gathered from MFIs, included the distribution of the clients (major cities, towns and rural areas), lending mechanisms, types of clients and financial loans offered. Further inquiries were made on other services given to supplement loans, rate of client turnover etc. From the medial side of the clients (MSEs), the questions were predicated on ease of accessing loans and technical support from the MFIs, and changes to their welfare as a result of the MFI loan.
The introduction of MFIs sometimes appears as the best alternative way to obtain financial services for low income earners in rural areas as a way to improve their income, hence reducing their poverty level. However evidence has shown that these MFIs have limited coverage, poor organizational structures and some are donor driven. These findings stimulated research to investigate if the coverage of MFIs is really as stipulated in the National Micro Finance Policy (NMFP) that is, covering small business owners and the poor rural population.
This study aims at finding out the extent to which Microfinance Institutions (MFIs) contribute to poverty decrease in Haryana, and whether they meet the objectives of the policies that led to their establishment.
The study centred on the following specific aspects:
To evaluate whether MFIs direct their services to the indegent population and micro and smaller businesses (particularly in rural areas) and whether conditions and procedures for credit favour these target groups.
To assess whether the customers reached by these schemes improved their general performance in conditions of growth, creation of employment and generation of income.
Do the conditions and procedures set by MFIs favour the poor and low-income earner clients?
Do the prospective groups receive satisfactory MFIs services?
To what extent do MFIs services donate to poverty reduction? (This implies a rise in MFIs' customers' wealth, i. e. generation of more income, upsurge in investments, creation of more occupations, etc. )
This study will be of great benefit to MFIs, policy makers, MSEs and the city at large. The study explores and recommends potential areas that MFIs need to put more efforts when delivering their services. Alternatively, policy makers will also benefit in the sense that, the findings provide informed suggestions on how policy can be improved. With improved and easy to implement policies, more MSEs and the city at large will be able to access and benefit from the services of MFIs.
The study covered four regions of Haryana that contain a high concentration of MFIs.
In these four regions the study covered a complete variety of 352 MSEs supported by the selected MFIs. The MSEs were selected by random sampling (using the appropriate table).
The study employed different ways of data collection, whereby both primary and secondary data were collected. Questionnaires were administered to both MFIs and MSEs to gather the primary data. In addition to this method, interviews were conducted in order to gather relevant additional information.
The study also used secondary data, and the primary sources were various official documents and reports highly relevant to the study problem. Questionnaires were first administered to few respondents from both MFIs and MSEs as pre-test and appropriate adjustments were made.
The descriptive and statistical analysis was conducted basing on data and information collected from primary and secondary sources on both MFIs and MSEs. The information analysed on MFIs included general profile, clients' outreach and the marketplace, product and services provided, impact assessment, and future plan and constraints. Privately of MSEs, the problems analysed included general profile, types of services received from MFIs, conditions for service accessibility, and future plan and constraints for growth.
Quantitative data were analysed using the Statistical Package for Social Science (SPSS) software to compute percentages, tabulation and cross-tabulation of responses. SPSS was chosen since it may take data from almost any kind of file and use them to generate tabulated reports, charts, perform descriptive statistics and conduct complex statistical analyses.
The study covered numerous kinds of MFIs, starting from merger, self finance/informal sources of finance to formal sources like credit/savings institutions, microfinance bank, and private commercial banks. Among the list of surveyed institutions the majority (43. 2%) were credit and savings institutions, 18. 9% credit only (not-for-profit organisations), 8. 7% microfinance banks and 5. 4% private banks. The survey also included various other institutions such as faith-based organizations, the Presidential fund, parastatal organizations and government institutions supporting MSEs (23. 8%).
The findings revealed that, MFIs used various lending mechanisms. A few of these observed included "solidarity group" (individual lending with cross guarantorship), individual lending, and village bank lending. Through the survey it was observed that the most used method was solidarity group, with individual lending and village bank lending supplementing the solidarity group method.
Both urban and rural MSEs were covered. The majority (98%) were found in cities and towns in comparison to 2% located in rural areas. MSEs covered were those established between 1980 and 2003. Many of them (64. 7%) were established by capital extracted from other sources and later received a loan from a MFI. Few of them, 35. 3%, were established through capital from a MFI. One of the surveyed MSEs, 59. 8% were formal registered enterprises and 40. 2% unregistered ones. It had been further observed that the majority of the surveyed MFIs (73. 5%) started microfinance functions between 1990 and 2001.
The findings show that the majority of clients served by MFIs were in the informal sector as shown in Table 4. 1. Among the surveyed MFIs, 89. 7% dealt with informal/unregistered businesses with less than 5 employees, while 34. 8% of MFIs handled registered business in support of 17. 4% of MFIs dealt with registered businesses with an increase of than 5 employees.
Status of MFIs' Clients
Informal Sector/Unregistered businesses
Registered Businesses with less than 5 employees
Registered Businesses with more than 5 employees
Source: Field data
Most of the MFIs concentrated their activities in either town centres or major cities. On average it was observed that 37. 6% of MFIs businesses are located in major cities, 48. 0% around centres in support of 14. 4% of MFIs are based in rural areas. The indegent state of the physical infrastructure was an obstacle in reaching remote areas.
Few clients accessed the technical support made available from MFIs. Out of the 352 surveyed MSEs only 38. 7% received tech support team (Table 4. 2). The results further revealed that the majority (43. 4%) of clients who received technical support had attained a typical level of secondary education.
Of those clients who had received technical support, 21. 5% were clients of PRIDE Haryana. Another institution which offered tech support team was SIDO, with 11. 5% respondents obtaining tech support team. Beneficiaries of other institutions had received tech support team but at an extremely minimal percentage. The pre-loan training offered by almost all of MFIs had not been considered as tech support team training by most MSE owners.
To a huge extent MFIs operating in Haryana have brought about positive changes in the standards of life of the customers who received MFI services. 81. 3% of the surveyed MSEs revealed that their profit had increased after obtaining the loan. Most of the clients (54. 6%) who experienced an increase in profit after acquiring the loan were in this group of 25 to 39 years. With regard to the amount of education, almost all, 37. 6% of respondents who had achieved a positive change in their profit following the loan had attained an ordinary degree of secondary education.
With regard to the constraints in running a business, 92. 5% of respondents cumulatively pointed out lack of continued business support and training as the major constraint. Despite having working out provided by MFIs in some instances, it did not meet expectations of recipients. As the case of 1 MFI, PRIDE Tz:
"The pre-loan training normally aims at familiarizing the customers with the PRIDE's loan terms and conditions".
The PRIDE Tz loan sizes ranges from 50, 000 (about US$50) to 5, 000, 000 (about US$5, 000) as shown. The existing loan sizes were reviewed in 1996. Previously, the minimum and maximum loan sizes were 50, 000 and 600, 000 respectively. The bigger loan sizes have been reviewed upwards overtime as the minimum loan size is not reviewed since inception of the programme.
Further discussions were conducted with 18 PRIDE Tz clients to obtain additional information how PRIDE Tz assisted their MSEs. The respondents had MSEs which operated in various types of businesses. Of the interviewed respondents 44. 4% were male and 55. 6% were female. In addition to the individual interview, a focus group discussion was conducted to acquire views of clients as an organization. This subsection presents the findings of the interview and focus group discussion of MSEs supported by PRIDE Tz.
This section covers the overall profile of MFIs and MSEs, types of clients, market outreach and types of services provided by MFIs. In addition, it presents the findings of MFIs impact assessment, conditions for service accessibility and the contribution of MFIs to poverty reduction. Furthermore, the findings of the research study of Promotion of Rural Initiative and Development Enterprise PRIDE Haryana Limited (PRIDE Tz) which was conducted to obtain additional insights of microfinance contribution to poverty reduction are presented. The chapter concludes giving the summary and implication of the results
To a big extent MFIs procedure in Haryana has taken about positive changes in the standard of living of folks who access their services. Even though some of the customers havent benefited, most MFIs clients have benefited positively. Despite the achievements of MFIs clients, most of them complained that, the rates of interest charged by MFIs were high.
The findings reveal that the procedure of application for loans starts with bit and after repayment the client can make an application for next higher amount. This process was observed to be a limiting factor for those customers who needed a large amount right from the beginning. That is true because it takes an unnecessarily long time for those seeking a huge loan to obtain enough funds to meet their needs. As well as the time taken to receive large loans, the clients also raised concerns about the time frame from the receipt of the loan to enough time of starting repayment, which is just one week after the disbursement of funds in most cases. The surveyed MFIs conducted a pre-lending training programme, but it was further observed that, the training was provided by loan officers who weren't experts or practitioners in the area of small business. Working out concentrated more on familiarising the customers with loan terms and conditions rather than providing small business skills. This practice may build up the spirit of loan repayment but does not influence business growth. Clients also mentioned that, the mandatory weekly reporting to the MFIs office was very high (i. e. one day atlanta divorce attorneys week where they spend almost the whole day). This consumed a lot of productive time and therefore reduced the time they could focus on other productive activities.
The following tips are put forward to be able to improve operations of MFIs.
1. The interest rate should be lowered to an even that would cover MFIs' operating expenses and at the same time facilitate the growth with their clients' business.
2. MFIs should think about the possibility of increasing the grace period and reducing the frequency of repayment to be able to give clients with long-term loans decide on businesses such as farming.
3. The poor state of the infrastructure, especially rural roads, was described as the key reason MFIs fail to operate in rural areas. In addition to improvement of infrastructure the federal government of Haryana, in collaboration with MFIs, should introduce trade exhibitions to their micro and smaller businesses to be able to expand the MSEs' market coverage.
4. MFIs should restructure their training contents to include enhancing their clients' business skills. They need to organise regular business training for their clients and qualified training institutions should conduct this.
5. Regarding the problem of small base loans, the MFIs should be flexible by raising the minimum base to reflect changes in the value of money over time.