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.
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.
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(2005). Bakhtiari, S. (2006). Microfinance and Poverty Reduction some
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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
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7. Yaron, J. (1992). Rural Finance in Developing
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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.
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11. Sen, A, delivery the monetary consensus
(Economic paper series-48)
12. Bateman, M. & Chang, H. (2009)
