Monday, 1 July 2013


Swapnil Dubey

            Poverty has been one of the most burning and unresolved issues in the human history. Government, Non government and international organization have been cooperating to fight poverty in different parts of Uttar Pradesh. In recent years, microfinance has been recognized as an effective tool to alleviate poverty. Microfinance offers the poor a chance t get access to financial service such as credit and savings. They can apply for small loans or financial help and use it to run small businesses such as selling chickens, eggs, small shop, vegetable shop, kirana store, husbandry, and other small scale business or other basic agriculture commodity. They also have opportunities to save money in saving accounts. Microfinance programs in different place in Uttar Pradesh all show positive impacts on the poor as they help the poor, first, to smooth their daily expenditure then to enhance welfare and stabilize income.
                Microfinance aims to bring finance service to poor people as to provide small-scaled financial services primarily savings, credit and insurance to people performing small or micro business activities such as farming, fishing, herding or micro enterprises producing, recycling, repairing or selling goods. Microfinance programs are financially supported by governments and international organization which means that microfinance programs depend on financial grants from donors and governments to great extent. When those financial resources are over, microfinance institutions would find it difficult to maintain the operation of microfinance programs, thus, the impacts on poverty alleviation would be diminished. As a result of this, microfinance programs face resource constraints and are not self-sufficient. This hinders microfinance institutions' ability to expand their service to the very poor or extremely poor communities.
                Microfinance has gained global acclaim as an importance poverty reduction tool in may developing.1 According to Morduch2, few recent innovations have held much hope for reducing poverty in developing countries as microfinance. Indeed microfinance is perceived as a crucial driving mechanism towards achieving the millennium development target of halving extreme poverty and hunger by 2015.3 Poverty reduction is unarguably the overarching objective for governments, NGOs, and other developmental partners for investing in microfinance. According to leading advocates in the field, microfinance has the capacity to efficiently and effectively provide sustainable financial services to poor households who are otherwise excluded from the conventional financial systems for lack of collateral. 'Microfinance is not simply banking, it is a developmental tool' .4
                In the microfinance industry in recent times, there has been a palpable shift from the poverty reduction objective to enabling microfinance institution to be sustainable. In this regard the 'success' of microfinance institutions are judged by their ability to be financially sustainable and poverty reduction objective is assumed to be achieved when microfinance services are made available to the poor. This implies that more microfinance' can be substituted for 'more poverty reduction'.5 The idea of striving for financially sustainability is that is institutions which do not depend on external support or subsidies that can grow and achieve wide outreach and have the maximum impact on service users.6 Terminologies such as dual objectives of microfinance and in addition catchphrases such as 'financial inclusion' and a 'win-win situation' have been coined to legitimise the prominence now being accorded to financial sustainability. Why has institutional sustainability become so important?
                Two main strands of arguments have been adduced for the above development. First argument is related to the historical antecedents of microfinance. Inspired by the idea that widespread shortage of credit constituted a major constraint to development of agriculture which happened to be the backbone of most developing countries7, donors and governments of developing countries created formal agricultural credit systems also known as Agricultural Developments Banks (ADBs). In conformity with the then prevailing state-led development paradigm, as exemplified by the Keynesian economic doctrine which provided a justification for greater economic role for governments, the ADBs, which were state-sponsored financial institutions, were tasked with the responsibility of offering subsidized microcredit to small scale farmers. They encouraged the adoption of new technology through training and education in agricultural production techniques and entrepreneurship and thus ensuring the growth of the agricultural sector in general.8 Micorfinance reflected the top-down and supply driven ideas prevalent at that period.
                In spite of the good intentions and the advantage of operating on national scale, ABDs nearly failed universally and their disaster stories are well-documented.9 As already mentioned, ABDs mostly adopted supply-driven strategies that neglected savings-mobilization and other financial services in favour of external funding and emphasized top-down controls. These banks also had weak and dysfunctional governance structures and internal control mechanisms which were unable to prevent this political intrusion and were unable to discipline delinquent borrowers.10
                Based on the previous microfinance experience, proponents of financial sustainability argue that permanent reliance on subsidies and political interference are inimical to the survival of microfinance interventions. They urge microfinance institutions to strive to be financially sustainable and in order to ensure that microfinance wean themselves off subsides, donor and governments interferences that may lead to their collapse. By operating in an efficient manner and charging interest rates that will enable them to expand, microfinance institutions provide financial services to the poor on sustainable basis.
Microfinance Objectives under Institutional Sustainability Regime
                This paper proposes an alternative strategy- the contextual sustainability approach-for microfinance institutions in developing countries which are determined to achieve both sustainability and poverty reduction but with poverty reduction being the ultimate objective The contextual sustainability approach means adapting microfinance interventions to suit the context withy the aim of achieving both sustainable poverty reduction, institutional sustainability and other objectives. Context refers to service users, environment, economy, culture and other factors that can potentially effects the implementation and effect of microfinance interventions.
                The paper argues that if microfinance institutions initially concentrate on adapting microfinance interventions to suit the context in which they operate (and issue that has not gone beyond mere rhetoric for most institutions) they are likely to achieve poverty reduction and also achieve long-term sustainability. It is argued that if microfinance institutions are able to make an impact on poverty, they are likely to experience improved and sustained repayment rates, and also offer larger and more profitable loans. This should enable microfinance institutions experience long-term sustainability.
Hierarchical Order of Objectives for Microfinance as a Development Tool
Poverty Reduction
(Fit financial service to needful)
Institutional Sustainability
                After the order of the importance of the objectives has been established we now move on the order for achieving both poverty reduction and institutional sustainability. As seen in Figure, MFIs which strive to achieve sustainability have no incentive to pay attention to poverty reduction, especially if sustainability can be achieved without poverty reduction.
                In Figure above it is argued that by concentrating in poverty reduction MFIs can achieve both sustainability and poverty reduction. Focusing on poverty reduction means ensuring that microfinance interventions are tailored to the needs of the service users. It also means institutions being sensitive to service users' complaints and appreciations of various aspects of the intervention.
                In spite of long-term efforts, poverty remains one of the major issues of concern for lower levels. Although the income gap in both urban and rural areas has declined substantially, high levels of income poverty persist. According to Sen 43.6% of the rural and 26.4% of the urban population of the country were poor in 2000.
                Reaching the very poor should be importance part of every MF's strategy. In an environment where external funds were becoming increasingly scarce, MF's has to find innovation ways of responding to the needs of the poorest, while at the same time ensuring the financial sustainability of the programmes. The focus on credit was therefore in response to the immediate needs and demands of members, as well as strategy to achieve financial sustainability for the organization. The expansion of microfinance must to be rooted in the expectation that it can help generate self-employment, which can ultimately solve both the problems of unemployment and of poverty. It has also been expected that provision of credit to Poor women will increase women's labour force participation through creation of new self employment opportunities.
                First, every Mf must always opted for the "credit plus" approach, where loans are given to poor women in combination with health care services, various forms of skill-training, non-formal primary education for children of members, social development and the creation of grassroots organization for the poor.
                Second, in order to reach the diversified groups of the poor, MF must apply different approaches for facilitating their access to financial resources in the form of microfinance services. Some of these are enumerated:
Rural Development Programmes- MF should go for Rural Development Programmes as an integrated development package meant to lead to the social economic empowerment of poor households in rural areas and produce sustainable improvements to their livelihoods.
Various works that can do are as follows; Micro-finance service, Essential healthcare Programme, Lending Assistance, Income Generation for Group Developent, Employment and Income Generation Programme and Research.
Sustainability at the cost of outreach to the poorest
                Although microfinance targets all the poor in theory, in practice it often fails to reach those living in extreme poverty.
                As indicated above, income generation programmes was able to reach large number of the poor groups not previously able to participate in mainstream microfinance. However, some groups still remained beyond its sphere of influence. It was realized that the Rural Development Programme strategy was inadequate for reaching certain sectors of the poor. First, RDP did not have detailed and differentiated analysis bout different categories of the poor. It sought to include everyone living below the poverty line and assumed that the poorest would be reached by the same package of service as the moderately poor.
                Second, a main goal of RDP was to enable members to ensure a large degree of financial sustainability with its micro-finance services, while reaching people falling below the poverty line. Hence, it was to replicate the credit plus model on a large scale, reaching near four million women, in a cost-effective way. However, this model proved most appropriate for the group defined as the moderate poor, and not so appealing to the bottom 25% of the poor.
Challenging the Frontiers of Poverty Reduction
                Recognising these gaps and wishing to address the problem of exclusion of the poorest groups, the Challenging the Frontiers of Poverty Reduction programme should be initiated by Mf's, and aims to help very poor women move out of poverty and attain more sustainable livelihoods. This programmes responds to the often overlooked difference between the poor, and to the fact that different interventions are needed for the poor according to the severity of the poverty they face. Therefore while the "moderate poor" in places can use conventional micro-credit packages very effectively, the ultra poor need a package that combines both protection and promotion of livelihoods/livelihoods strategies.
                Poverty Reduction Programmes is a special investment programme targeted towards the ultra poor. The goal of this programme is to develop a new model that can produce sustainable improvements in the lives of the ultra poor. The model consists of a combined package involving the promotion of new income generating activities as well as a social safety net components to assist poor households to cope with various shocks such as ill-health, or natural disasters. All this support will be given to the women and their households over a period of 18 months, by the end of which they are expected to achieve a relatively more secure bas required to join the a mainstream micro-finance programme.
                The second argument concerning the primary of sustainability of microfinance institutions stems from what Bateman and Chang (2009) 12 call the intimate relationship between microfinance and neoliberalism. Burkett (2007)13 says the idea of self sustainable microfinance  is in consonance with neoliberal and neoconservative  economic agenda which emphasize market-oriented solutions to development microfinance like all other  institutions need to earn their keep on the market. In this regard microfinance institutions were required to wean themselves off all forms of control (including state, donors or subsides). Microfinance institutions are expected to behave in a business like manner including charging market interest rates and make profits in order to attract capital into the microfinance industry. Profit making and competition in the microfinance industry is expected to culminate in microfinance reaching greater numbers (outreach) and reduce the cost of financial services to service user. The aim is to enable microfinance institutions to become self sustaining economic units providing financial service without the need for state or donor interference.
                The two arguments in favour of financial sustainability are well intentioned and have an intuitively favorable appeal making microfinance institutions efficient and financially sustainable will enable more poor people to gain access to microfinance result in greater numbers of people becoming less poor. It is argued that microfinance institutions which experience growth will enjoy economics of scales and result  in lower costs to service users.
                The setback regarding the institutional sustainability objective is that is has become the overarching objective of the microfinance industry. According to Simanoqitz (2002) 14 while the microfinance industry has established clear best practices and guidelines for measuring and reporting financial performance, there are no established similar standards for assessing outreach and impact. In developing countries where microfinance is provided and used as a development tool, institutional sustainability or what CGAP (2004) 15 calls solid financed as a development means of achieving poverty reduction rather than being and end in itself. Thus institutional sustainability  is seen a necessary but not a sufficient condition for poverty reduction. It should be pointed out here that the importance of sustainable microfinance institutions to poverty reduction cannot be over emphasized.
Reference :
1.   Johnson, S. and Rogaly, B. 1997 "Micro Finance and Poverty Reduction', Armendariz de Aghion, B. & Morduch, J. (2005). Bakhtiari, S. (2006). Microfinance and Poverty Reduction some International Evience. International Business and Economics Research Journal, 5(12).
2.   Morduch, J. (2000). The Microfinance Schism. World Development, 28 (4), 617-629.
3.   Simanowitz, A. (2000). Client Exit Surveys: A Tool for Understanding Client Drop-Out. Journal of Microfinance, 2(1) : 112-137.
4.   Ledgerwood, J. (1999) Microfinance Handbook : An Institutional and  Financial Perspective, The World Bank, Washington, D.C.
5.   (Bateman and Chang, 2009 :2) Microfinance and the Illusion of Development : From Hubris to Nemesis in Thirty Years.
6.   Robinson, M.S. (2003). The Microfinance Revolution : Sustainable  Finance for the Poor. Washington DC : World Bank.
7.   Yaron, J. (1992). Rural Finance in Developing Countries. WPS No. 875 Agriculture and Rural Development Department. Washington D.C: World Bank
8.   Ibid
9.   Morduch, J. (Morduch, J. (2000). The Microfinance Schism. World Development, 28 (4), 617-629, Gonzalez-Vega, C. & Grahm, D.H. (1995). State Owned Agricultural Development Banks: Lessons and Opportunities for Microfinance. Economics and Sociology Occasional Paper. Rural  Finance Programm, department of Agriculture Economics, The Ohio State University, Robinson, M.S. (1995). The paradigm Shift in Microfinance : A perspective from HIID. Discussion paper no. 510 Cambridge, MA : Harvard Institute for International.
10. Gonzalez-Vega, C. & Grahm, D.H. (1995). State-Owned agricultural Development Banks : Lesson and Opportunities for Microfinance. Economics and Sociology Occasional Paper. Rural Finance Program, Department of Agricultural Economics, The Ohio State University.
11. Sen, A, delivery the monetary consensus (Economic paper series-48)

12. Bateman, M. & Chang, H. (2009)