i latest article i wrote along with few of my friends ...
MICROFINANCE – A RAY OF HOPE
Helping poor to help themselves
When Ameena Bi and her husband Abdul Latif from Kolar, Karnataka worked as daily wagers they could barely make INR.120 (USD 2) per day as wages. While Ameena was a construction labour, Abdul worked at a shop making mattresses. With three school-going children to fend for, they had a tough time making ends meet. She first started up a mattress business and performed exceptionally well in the business. Later she took up floriculture by availing another loan from SKS microfinance. Today, Ameena earns INR 300 (USD 6) per day and during festive and wedding seasons this amount goes up significantly.
Kursheed begum from shamirpet near Hyderabad started a small kirana shop by availing loan from spandana microfinance to her household income. Her husband was a construction worker. She gained profits from that business and opened up a tailoring business. Today, she is leading a peaceful and a very wealthy life.
There are many such endless examples which depict the importance of microfinance especially the people living at the grass root level. The World Bank estimates that half of the world lives on $2.50 a day or less. In today’s world where communication is so fast even then we can see that a large population is dependent on money lender, informal source of credit or no access to credit at all.
Why poor cannot take loans from bank?
“A business without a credit is like a lamp without oil” is a proverb that happens to suit the topic of our discussion. Credit is indeed one of the most crucial elements for any business, irrespective of who is doing the business. Even the big shots like Ambani brothers require credit for their business and they still rely upon banks for credit.
Why do banks don’t hesitate to give credit to these big business tycoons? There are majorly three reasons for this. Firstly, for any loan or credit to be transacted an “identity” of the borrower is must, and it doesn’t seem to me that Mukesh Ambani would face any problem in proving his identity. Secondly, there is a requirement of a “transaction history” which is already available with most of these business tycoons. Third and the most important is the “requirement of collateral” which is available with the rich as inherited property from their forefathers.
Most people living in rural area on other hand fail to prove their identity, don’t have a transaction history as they don’t have any access to bank and they fail to provide any collateral because they don’t have any.
Why poor fail to save money for their business?
Poor people run into problems with money management at this very first hurdle. If you live in an urban slum or in straw hut in a village, finding a safe place to store savings is not easy. But the physical risks are the least of the problem. Much tougher is keeping the cash safe from the many claims on it - claims by relatives who have fallen on hard times, by importunate neighbours, by hungry or sick children or alcoholic husbands, and by landlords, creditors and beggars. Nevertheless, the poor can save, do save, and want to save money. Only those so poor that they have left the cash economy altogether - the elderly disabled, for example, who live by begging food from neighbours - cannot save money.
Why do poor need to be banked?
Just because the economic status of most people in rural area is poor, it doesn’t mean that they don’t spend. Although most of their spending is on food, shelter and clothing but sometimes large lumps of money is needed for things like; Life cycle needs such as marriage function and festive events such as Diwali etc. These are few of the examples of life cycle event. Poor also need large amount of money in case of emergencies which may be personal or impersonal. Personal may be accidents, health problems etc and impersonal can be natural calamities such as flood, cyclones etc.
As well as needs for spending large sums of cash, there are opportunities to do so. There may be opportunities to invest in an existing or new business, or to buy land or other productive assets.
Microfinance – banking the unbankable
MFI’s did something that most people thought is impossible, and successfully found their way to “reach the poor”. Microfinance became a boon for the poor and helped them survive, sustain and grow. MFI’s grew and their success was because they did things that banks and other financial institutes failed to do.
Microfinance provided “reach” to people living in rural area that banks failed to do. They worked at grass root level by establishing a workforce in the rural areas. These employees generally are educated rural youth who handled loan transaction and could also maintain a personal contact with the borrowers.
People living in rural area most of the times failed to provide an identity when seeking a loan from a bank. MFI’s did not face much problem with this because they generally dealt with a group of people who know each other. MFI’s would be providing the loan to the group and the group as a whole have to pay back the loan and as a result each member will have his own identity in the group to which he/she belongs.
The problem of transaction history which is required by the banks is also successfully dealt by the MFI’s. For example MFI’s have the facility of availing the loans to SHG’s. SHG’s have the function of weekly collection of the money and giving it to the needy person of the group. This type of function makes up the transaction history which is enough to claim loans.
It is client friendly uses simple and minimum procedures has flexibility of approach and has low transaction cost both for the borrower and lender.
The big idea.........
Biggest challenge that MFI’s faced and the core reason for banks not being successful is the issue related to “collateral and loan recovery”. Banks ask for a collateral or security which a property is owned by the borrower and which will be seized in case of default. Poor people living in rural area don’t have any collateral or security and hence banks seldom venture into financing the poor. Banks are left this question of how to recover the loans from the poor?
But MFI’s despite having the same constraint have developed a model which has so far ensured 97-98% loan recovery. They don’t ask for any collateral from poor and needy people but rely upon something called as “Social collateral” or in simple words “social pressure”. There are two major ways in which microfinance create a social pressure. First one is that borrowers are supposed to pay back loan in a group and hence if one member is planning to default then he will be pressurised by other members of the group to repay the loan. Secondly, MFI workers at the village level conduct weekly meetings and maintain personal contacts and thus ensuring recovery of loans.
Impact
Microfinancing has broadened to the concept of inclusive finance, delivering to the world's poor the basic financial infrastructure that is a foundation of wealth development and risk management. It serves as an effective instrument for lifting the poor by providing them increased self employment opportunities and making them credit worthy.
Scaling up the microfinance presents daunting challenges. Chief among them are the high costs of reaching deep into rural backwaters and inner-city slums, and of servicing very small transactions. Meeting these challenges requires creative alliances and cultural insight as well as technical innovation. Microfinance institutions (MFIs) are capable of contributing to health improvements by increasing knowledge that leads to behavioural changes, and enhancing access to health services through addressing financial, geographic and other barriers. They have offered unique and underutilized opportunity that could be more widely deployed for the delivery of health-related services to those most in need. Accessibility to finance through MFI’s to poor people has increased their possibility of providing their children’s with good quality education. The number of school dropouts has also significantly decreased.
CONCLUSION
The Microfinance sector has to meet the total demand of 15-20 thousand crores. The goal is to promote an environment in which the poor can access credit and other financial services quickly, easily and at minimum cost. The delivery of microfinance ultimately leads to the development of nation empowering people living in the country .The vast unfinished agenda, the tasks done, done partly or done poorly, forces of apathy and status quo, rapidly a realisation that in the end human endeavour is meagre and that the distance between effort and achievement is indeed long way to go ....Microfinance is a ray of hope.
