PAPER

PRESENTATION AND PUBLICATION IN

NATIONAL CONFERENCE
ORGANISED BY

SRIDEVI INSTITUTE OF ENGINEERING AND TECHNOLOGY,

TUMKUR, KARNATAKA STATE

TITLE

"Impact of Microfinance on alleviation of

rural poverty and social upliftment"

By
Dr.N.Moogana Goud
Professor and Director
Dept of Management Studies
SJC institute of technology
Chickballapur
CELL: 97390 96281
Email:[email protected]
INTODUCTION
In the world today, 1.2 billion, 20% of the worlds population, live on less than one dollar
per day, 325 million boys and girls do not have access to primary education, 856 million adult
are illiterate of which 64 percent are women (HDR, 2001). The poorest and poverty alleviation
has become the object of unprecedented attention nowadays both at national and international
levels (e.g. attaining the Millennium Development Goals by 2015, or the Micro credit Summit
2006 in particular), and both the national and international communities has committed to the
targets set by both the OECD International Development Goals and, most recently, the MDGs
which focus on poverty alleviation for those living on less than a dollar a day. Microfinance has
proven to be an effective and powerful tool for poverty alleviation.
Thirty years ago, a group of development revolutionaries created a new strategy for
attacking global poverty by providing small, uncollateralized loans to some of the poorest people
in the world. Families were able to start or expand tiny businesses and, as a result, many found a
dignified route out of poverty.
Though microfinance born in the early 80s in Bangladesh has been extensively under
examination by mainly the western experts over the past 10 to 15 years, and the resulting
literature is now very large. There are many focused review of the literature done to evaluate the
impact of microfinance on poverty reduction. There has been development of many monitoring
tools like CGAP’s Poverty Assessment Tool, Cashpor Housing index, SEF’s Participatory
Wealth Ranking, and USAID’s AIMS Tools to assess the poverty outreach of microfinance.
WHAT IS POVERTY?
In many countries, poverty may be defined by income only. Countries, states or even
counties may set poverty lines. People who live below these lines or just above them might be
considered impoverished, while those who live well above the line are clearly not. While this
may prove one helpful way to evaluate how to help those with little, there is significant
discussion about where these lines should be set (wisegeek).
Much has been written about the meaning of poverty. Poverty is a situation or a condition
of people where it
• deprives people of their security and well-being;
• deprives people not only of safe water and adequate food, clothing and shelter,
but also education and healthcare;
 • takes away people’s rights, and their freedom, dignity and peace of mind;
• Puts people's lives in danger and robs them of their future.
Poverty is a situation of condition of life, where people find it difficult lead a minimum
life having acceptable standards. Since its independence, the issue of poverty within India has
remained a prevalent concern. As of 2010, more than 37% of India’s population of 1.35 billion
still lives below the poverty line. More than 22% of the entire rural population and 15% of the
urban population of India exists in this difficult physical and financial predicament (economy
watch)
There are number of factors responsible for the persisting poverty in India since the
years. Among the causes ascribed for the high level poverty in India the most important are its
history under colonial rule, more people living in rural areas, more dependence on agriculture
sector, India’s social structure, and growing population, more imports, low illiteracy and
unemployment.
Poverty in India is widespread with the nation estimated to have a third of the world's
poor. According to a 2005 World Bank estimate, 42% of India's falls below the international
poverty line of $1.25 a day (PPP, in nominal terms Rs. 21.6 a day in urban areas and Rs 14.3 in
rural areas); having reduced from 60% in 1980.[1] According to the criterion used by the Planning
Commission of India 27.5% of the population was living below the poverty line in 2004–2005,
down from 51.3% in 1977–1978, and 36% in 1993-1994. (Poverty estimates for 2004-05,
planning commission, Government of India)
Indian poverty rates are defined as the fraction of people living in households who falls
below the poverty line. Sometimes the poverty is measured in terms of calories of food the poor
take every daily.
WHAT IS MICROFINANCE?
Poor people usually depend mostly on informal delivery channels of finance that is
offered at a high rate of interest involving the stringent recovery measures. Even for savings also
the poor trust the unorganized system aspiring for fair interest on savings taking huge risk. The
poor and downtrodden has a rare accessibility to organized financial institutions, since they are
unable to meet the minimum stipulation of the banks. Forget about availing loan, they are even
finding it difficult to open their savings bank account as the banks insist for the introducer to
open an account. The other reasons the poor does not have access to formal banking institutions
are they do not have

a) money to open account

b) capacity to bring in collateral security,
c) capacity to provide down payment
d) regular income to meet the eligibility condition for availing loans.

In this contest the Microfinance is a boom for the poor and downtrodden.

Micro credit and microfinance are relatively new terms in the field of development, first
coming to prominence in the 1970s, according to Robinson (2001) and Otero (1999). Prior to
then, from the 1950s through to the 1970s, the provision of financial services by donors or
governments was mainly in the form of subsidised rural credit programmes.

According to Otero (1999, p.8) microfinance is “the provision of financial services to low-
income poor and very poor self-employed people”.

• These financial services according to Ledgerwood (1999) generally include savings and
credit but can also include other financial services such as insurance and payment
services.
• Schreiner and Colombet (2001, p.339) define microfinance as “the attempt to improve
access to small deposits and small loans for poor households neglected by banks.”
• Microfinance is an idea whose time has come.” (Kofi Annan, former United Nations
Secretary-General)
Microfinance offers poor people access to basic financial services such as loans, savings,
money transfer services and micro insurance. (CGAP). Microfinance is also a means for self-
empowerment. It enables the poor, especially women, to become economic agents of change -
they increase income, become business-owners and reduce their vulnerability to external shocks
(illness, weather, etc)
MICROFINANCE AND MICRO CREDIT.
In the literature, the terms micro credit and microfinance are often used interchangeably, but it is
important to highlight the difference between them because both terms are often confused. Sinha
(1998, p.2) states “micro credit refers to small loans, whereas microfinance is appropriate where
NGOs and MFIs1 supplement the loans with other financial services (savings, insurance, etc)”.
(Okiocredit, 2005).

PURPOSE OF STUDY

The purpose of our study is to analyze the impact of micro finance in alleviation of poverty and
achieving economic growth of developing nations. The study has also following objectives. To
study and understand the role micro finance in alleviation of poverty and achieving socio-
economic development of the developing nations with special reference to india

The researcher has taken up the review of various impact assessment studies to
understand the contribution of Micro finance in socio economic development of the developing
nations. We present here a short literature review on how microfinance affects the lives of
the poor.

a. Robinson (2001) identifies two reasons why microfinance is important. First

microfinance provides the financial services, not accessible through the traditional
financial system. Secondly it builds the self-confidence of the poor. (Robinson
(2001) p. 37).
b. As has been mentioned in the introduction Murdoch (1999) argues that
microfinance often supplements other incomes for the borrowers and rarely
generates jobs for others. (Murdoch (1999) p. 1610).
c. A FINCA Client Poverty Assessment conducted in 2003, of which 81 percent of
interviewed clients were women, found that food security was 15 percent higher
among their village banking clients than non-clients.( Finca Client Assessment—
2003).
d. Fernando. A made an effort assess the impact of increasing financial access on
low-income people savings. Results show that the expansion increased the
average saving rate of affected households by more than 3 to almost 5 percentage
points. (Fernando. A. December 1999).
e. Robin.B and Rohini Pande reveals that Lack of access to finance is often cited as
a key reason why poor people remain poor. This paper uses data on the Indian
rural branch expansion program to provide empirical evidence on this issue. The
study estimates suggest that the Indian rural branch expansion program
significantly lowered rural poverty, and increased non-agricultural output.
(Robin.B and Rohini Pande, August 2003).
f. Abijit. V.Banerji used survey data from 13 countries to document the economic
lives of the poor (those living on less than $2 dollar per day per capita at
purchasing power parity) or the extremely poor (those living on less than $1
dollar per day). The paper concludes with a discussion of some apparent
anomalous choices. (Abijit. V.Banerji July 2009).
g. Mohammad Arifujjaman Khan and Mohammed Anisur Rahaman in their case
Study on Microfinance in the Chittagong District of Bangladesh observed from
our overall analysis that there is significant impact of microfinance activities
comparing to conventional banking system brought an improvement of the living
standard of the family not only in economic term but also in social term.
(Mohammad Arifujjaman Khan and Mohammed Anisur Rahaman, 2007).
h. The Swedish International Development Cooperation Agency (SIDA) reported on
an empowerment survey conducted between August 2003 and January 2004
covering five states in India and 1,025 households. According to the survey
results, 65 percent of Self Help Group households experienced an increase in
income over a three-year period, while 61 percent agreed that their hardships had
significantly decreased. Eighty-eight percent of respondents reported confidence
in meeting a financial crisis in the family, with a same percentage reporting an
increase in self-confidence after joining a Self Help Group Bank.. ( Melissa
Duscha, 2008).
i. Nathanael Goldberg in his review of literature provides a wide range of evidence
that microfinance programs can increase incomes and lift families out of poverty.
Access to microfinance can improve children’s nutrition and increase their school
enrollment rates, among many other outcomes. Yet it would be imprudent to issue
 a blanket statement that “microfinance works,” for the simple reason that there is
no one “microfinance” to test. Nathanael (Goldberg,2005)

Micro Finance in India

Microfinance has made tremendous strides in India over the years and it has become a
household name in view of the multi-pronged benefits reaped/ receivable from microfinance
services by the poor in our country. Self Help Groups (SHGs) have become the common vehicle
of development process, converging all development programmes. SHG–Bank Linkage
Programme launched by NABARD way back in 1992 envisaging synthesis of formal financial
system and informal sector has become a movement throughout the country. It is considered as
the largest microfinance programme in terms of outreach in the world and many other countries
are keen to replicate this model. This programme is also the main contributor towards the
Financial Inclusion process in the country. As on 31 March 2009, there are more than 61 lakh
saving-linked SHGs and more than 42 lakh credit-linked SHGs and thus, about 8.6 crore poor
households are covered under the programme. (NABARD)
The banks operating, presently, in the formal financial system comprises of Public Sector
Commercial Banks (27), Private Sector Commercial Banks (28), Regional Rural Banks (86),
State Cooperative Banks (31) and District Central Cooperative Banks (371). It is observed that
most of the banks participating in the process of microfinance have reported their progress under
the programme. (NABARD)
The following data available on the NABARD website gives the interesting information on
microfinance in Indian which is furnished below.

SELF HELP GROUP (SHG) - BANK LINKAGE

The following data available on the NABARD website gives the interesting information on
microfinance in Indian which is furnished below
1. Savings of SHGs with Banks
As on 31 March 2009, total 61,21,147 SHGs were having saving bank accounts with the banking
sector with outstanding savings of Rs.5,545.62 crore as against 50,09,794 SHGs having savings
of Rs.3785.39 crore as on 31 March 2008, thereby having growth rate of 22.2% and 46.5%
respectively.
2. Bank loans disbursed to SHGs
During the year 2008-09, the banks financed 16,09,586 SHGs, including repeat loan to the
existing SHGs, with bank loan of Rs.12,253.51 crore as against 12,27,770 SHGs with bank loan
of Rs. 8,849.26 crore during 2007-08 registering a growth rate of 31.1% (No. of SHGs) and
38.5% (Bank Loan disbursed).

2006-07 2007-08 2008-09

No. of Amount No. of Amount No. of Amount
Particulars SHGs SHGs SHGs

A. SHG-Bank Linkage Model

Savings of
SHGs with
Banks as on 416058 3512.71 5009794 3785.39 6121147 5545.62
31 March 4 (20.4) (7.8) (22.2) (46.5)

Bank
Loans
disbursed 110574 6570.39 1227770 8849.26 1609586 12253.51
to SHGs 9 (11.0) (34.7) (31.1) (38.5)
during the
year
Bank Loans
outstanding
with SHGs 289450 12366.49 3625941 16999.91 4224338 22679.84
as on 31 5 (25.3) (37.5) (16.5) (33.4)
March
Table: 1- Overall Progress under Microfinance during the last three years
(Rs in crores)

NOTE: Data in the bracket furnished indicate the percentage of growth to previous year
3. Bank Loans outstanding against SHGs
As on 31 March 2009, total number of 42,24,338 SHGs were having outstanding bank loans of
Rs.22,679.85 crore as against 36,25,941 SHGs with bank loans of Rs. 16999.90 crore as on 31
March 2008 with a growth rate of 16.5 % (No. of SHGs) and 33.4% (Bank Loan outstanding
with SHGs).
4. Recovery performance of Bank Loans to SHGs
On the basis of data reported by banks, out of 267 banks which have reported the recovery data,
181 banks (67.8%) had more than 80% recovery of SHG loans as on 31 March 2009 which is

2006-07 2007-08 2008-09

Particulars No. of Amount No. of Amount No. of Amount

SHGs SHGs SHGs

B. MFI-Bank Linkage Model

Bank Loans
disbursed
to MFI’s 334 1151.56 518 1970.15 581 3732.33
during the (55.1) (71.1) (12.2) (89.4)
year
Bank Loans
outstanding
with MFI’s 550 1584.48 1109 2748.84 1915 5009.09
as on 31 (101.6) (73.5) (72.7) (82.2)
March
observed to be the same as on 31 March 2008.

Table: 2- Overall Progress under Microfinance during the last three years
(Rs in crores)

NOTE: Data in the bracket furnished indicate the percentage of growth to previous year

LESSONS FROM BANGLADESH

Home to 135 million people, Bangladesh is currently the eighth most populous country in
the world with the highest population density—about 950 people per square kilometre. Eighty
percent of its population lives in rural areas and half of its population stills lives below the
poverty line—as measured by income, consumption, and ability to meet basic human needs—
making Bangladesh one of the poorest countries in the world (www.worldbank.org).
Bangladesh is a champion of Micro finance. Microfinance services in Bangladesh are
provided by a range of NGO-MFIs, microfinance banks, Garmeena Banks, government
programs, nationalized commercial banks, and private commercial banks. Group-based lending
methodologies prevail. The average annual growth rate in the microfinance sector in Bangladesh
over the five years 2003–2008 was 23 percent. It is expected to reach 25 percent annually over
the next three years (2009–2012) as a result of growing demand for larger loan sizes. Despite its
significant outreach—estimated at 60 percent of all Bangladeshi households—microfinance
assets remain less than 2 percent of GDP, having increased only marginally relative to GDP
since 2001.

The Indian micro-finance sector has many lessons to learn from the Bangladesh
experience. The micro-finance market in Bangladesh is mature and there is intense competition
among MFIs. They offer a wider choice of financial services, ranging from savings, micro-credit,
pension, insurance, and loans for business, agriculture, housing and disaster management to cater
to the needs of different groups, such as the extremely poor, poor, landless, micro-entrepreneur,
farmers, guardians of street children, and those affected by disasters.

As on 2008
S.L.NO Particulars Amt in USD
1 Gross loan portfolio 2.0 billion
2 Number of active borrowers 20.7 million
3 Average loan balance per borrower 93.1
4 Deposits 1.4 billion
5 Total assets 3.0 billion
6 Number of depositors 25.2 million

IMPACT OF MICRO FINANCE ON SOCIO ECONOMIC DEVELOPMENT

1. The review of literature on the research topic, the data on microfinance of various
countries including Bangladesh and progress made in India reveals that the microfinance
made a big impact in bringing socio economic reformation in developing countries.
2. The poor and downtrodden has a rare accessibility to organized financial institutions,
since they are unable to meet the minimum stipulation of the banks. Forget about availing
loan, they are even finding it difficult to open their savings bank account as the banks
insist for the introducer to open an account.
3. Microfinance sector has covered a long journey from micro savings to micro credit and
then to micro enterprises and now entered the field of micro insurance, micro remittance,
micro pension and micro livelihood. This gradual and evolutionary growth process has
given a great boost to the rural poor in India to reach reasonable economic, social and
cultural empowerment, leading to better life of participating households.(NABARD)
 4. Financial institutions in the country have been playing a leading role in the microfinance
programme for nearly two decades now. They have joined hands proactively with
informal delivery channels to give microfinance sector the necessary momentum. During
the current year too, microfinance has registered an impressive expansion at the grass
root level.
5. Littlefield, Murduch and Hashemi (2003, p.4) state that access to MFIs can empower
women to become more confident, more assertive, more likely to take part in family and
community decisions and better able to confront gender inequities.
6. Microfinance interventions have also been shown to have a positive impact on the
education of clients’ children. Littlefield, Murduch and Hashemi (2003, p.4) state that
one of the first things that poor people do with new income from micro enterprise
activities is to invest in their children’s education.
7. Robinson (2001) in a study of 16 different MFIs from all over the world shows that
having access to microfinance services has led to an enhancement in the quality of life of
clients, an increase in their self-confidence, and has helped them to diversify their
livelihood security strategies and thereby increase their income.
8. the NABARD Data on Microfinance shows that
• There is substantial growth in respect of savings of the people through SHG’s i.e.
46.5% in 2008-09 only against the growth of 7.8% in the year 2007-08.
• The loan disbursement and loan disbursement is also growing at the rate of 35%
and above.
9. Zohir and Matin (2004, p.318) 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.
CONCLUSION
The emergence of microfinance concept in the year 1972 has brought new hopes to the people
living in the developing countries. More specifically it had a definite strategy at empowering
rural women who were hitherto the unsung leaders in the rural economy in different developing
nations. India and Bangladesh have seen the tremendous turnaround in their rural economy due
to the impact of microfinance. Thus microfinance has played a vital role in alleviation of rural
poverty and social upliftment in many developing nations.

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REFERENCES
1. Bangladesh: microfinance and financial sector diagnostic study, final
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group.
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2003.
3. “Do Rural Banks matter? Evidence ffromthe social Banking
Experiment” Robin.B. and Rohini Pande, LSE, Yale University, August
2003.
4. “Economic lives of the poor” Abijit. V.Banerji and others , Yale
University, Darthmouth College, IPA, Financial Access Initiative, MIT
Jameel Poverty Action Lab July 2009.
5. FINCA CLIENT ASSESSMENT—2003,A Report on the Poverty and Impact
of 11 Country Programs, John Hatch, Director of Research Patrick
Crompton, Research Coordinator, January 2004.
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Chittagong District of Bangladesh”, Mohammad Arifujjaman Khan and
Mohammed Anisur Rahaman, Umeå School of Business (USBE)
Department of Business Administration, Masters Thesis, Fall 2007.
7. Is microfinance an effective strategy to reach the millennium
development goals? by Elizabeth Littlefield, Jonathan Murdoch, and
Syed Hashemi, the Focus Note Series no.24 , January 2003.
 8. “Measuring the Impact of Micro. Finance: Taking Stock of What We
Know” by Nathanael Goldberg, December 2005, Grameen Foundation
USA Publication Series.
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11. Poverty estimates for 2004-05, Planning commission, Government of
India, March 2007. Accessed: August 25, 2007.
12. The microfinance revolution: sustainable finance for the poor by

Marguerite Robinson, publisher: World Bank publications

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