Microfinance: The misunderstood tool of poverty alleviation

Small businesses, poor farmers, seasonal makeshift occupants often face a credit crunch. Lack of provisions within the larger framework of the banking industry makes them shift towards traditional money lenders, liquidating immovable assets. The concept of micro-credit or micro-financing as we know of it today was introduced to meet the needs of these people. Financial services of micro-savings and small loans are made available to individuals or groups for any entrepreneurial activity. Micro-credit is a global concept today with roots in a majority of nations across each continent.

Women from a rural self help group in Golaghat district of Assam taking part in an SHG exhibition

Micro-finance but, has been misunderstood by many as a financial/economic tool that has the intrinsic potential to alleviate poverty.  Provisions for making microcredit available is to make people a little more independent economically so that they can choose better options for themselves and for their children. Poverty brings with it a whole lot of issues ranging from health, education, nutrition etc. It’s a trap where one gets engulfed into if ever they enter it. Micro-financing is one effort that can break open the trap of poverty so that people may find a way out of it. The judging of micro-finance as an innovation of ending poverty cannot be singularly based on its innate ability to end poverty. Other than the evident economic impact it has of helping small businesses grow, providing income generation etc, social and political developments are certainly aspects of the parallel benefits coming out of microfinance. Micro-finance incentivises people to come together and form interest groups (“Self Help Groups (SHG’s)”) to avail common banking facilities such as common savings account, group loans etc. In our recent survey of such SHG’s in Raigad and Thane districts of Maharastra, India we found a uniform agreement on benefits of microfinance. The women who were interviewed reported higher savings and lesser debt crisis than before. On educating their children, providing nutritional food and better healthcare facilities they had a better grip and awareness than before. Much of it has to be attributed to the microfinance NGO’s which organises training and awareness camps for the SHG members. Overall, the women could feel more independent than before and their participation in “gram-sabhas” (village level governing bodies) also increased. Through such ground level governance platform the unified women could speak to improve facilities of water, electricity etc. and remove social evils that affect the fairer sex. Moreover economic benefits can occur in more ways than just entrepreneurship. The sudden needs of the poverty stricken people often lead them to sell of their land and other immovable. Microcredit helps them address these needs in a much more planned manner. The lack of such facilities would have meant that their condition would have been worse off

Critics of microfinance often cite two arguments against it: First that microfinance has not been able to develop entrepreneurship as deemed and secondly that it has often led to severe debts to individuals. To turn poor below poverty line people into efficient entrepreneurs is not an easy task. It may not have had converted 100% of the businesses started by availing loans under microfinance into profitable and efficient businesses. But certainly the entrepreneurial spirit is visible among a few who would have otherwise shuffled from one government office to another. In many cases it has also proved itself by setting successful avenues of income. Micro-finance is the first impetus given for economic growth towards poverty alleviation. It certainly should not be held accountable for not leading to overnight growth of businesses more so when its added benefits of social equity and political independency are definite add-ons. Debt crises, further entanglement in the debt loop are externalities of every credit system. Traditional lenders with their high interest rate and flexibly return structure throw people into debt as their onus is to maximize profit for themselves. Microfinance institutions on the other hand aims at economic independence and sustainability and hence focus more on monitoring of the loans. Yet cases might exist in which the microfinance loan put a person into debt. Better monitoring and counselling on loan reimbursement will help improve this scenario. Microfinance as an institution is moving ahead with its goal of poverty alleviation through economic growth and social equity amidst misunderstandings and misnomers. Its flaws in the system are not inherent but situational and temporal. Efforts to fight those flaws are the need of the hour.


6 thoughts on “Microfinance: The misunderstood tool of poverty alleviation

  1. Abdul Kalam Azad

    Good to see you are also interested in Microfinance. Being in the field for the last three years I have observed that government initiative has severely failed to feed to benefit microfinance to the under-privileged section of the society. One the other hand private players like Bandhan, RGVN, Ujjivan are playeing vital role to empower the women through microfinance. At the same time educating women about her financials is very much important. If the poor of the state were financially educated PONZI companies like Jiban Suraksha or Saradha could not been able to cheat those people. I have written on the importance of financial literacy and financial inclusion in Assam Tribune, timesofassam.com and Eastern Chronicle; but no initiative has been taken by government so far.

    Anyway good write up! carry on!!!

  2. lifeisbettertoday

    Let me give you my impression on Micro-finance. Traditionally all financial institutions targeted the rich providing financial tools to increase or manage wealth. When organised banking as a concept came to the developing nations, the concept of micro-finance evolved. Interestingly, it evolved not because the managers were altruistic. It evolved because it was tremendously profitable. SKS Finance for instance had average yields upwards of 38% and repayment rates of 98%.

    Micro-Finance or Loan in other word is and will be a revenue model. It is so, because of its inherent ability to generate profits. So it is NOT sustainable to think of micro-finance as a socialist initiative. It is a capitalist business. Having said that it therefore becomes imperative that there are policies to ensure that it is about profits, and not profiteering.

    Unfortunately, for whatever reasons, MFI as an industry is outside the ambit of our central bank – RBI. The monetary policy of the country therefore does not really cover MFIs and its impact. Now RBI is getting active on Financial Inclusion and therefore have released a few circulars on micro-finance. Currently, it is hazy.

    Micro-finance as an industry is associated with rural India (needn’t necessarily be that way), inconsistent income flows and higher risk of delinquency. So the interest rates are much higher in the market, as the risk cost is perceived or calculated higher to arrive at the cost of capital. With higher cost, comes higher interest rates and with that comes collection pressures for delinquent loans. Collection pressures have led to so many suicides in Maharashtra for instance.

    Till the time there are clearer policies, it wont be possible to tackle the negatives of the age-old money lending business. The big businesses wont come forward to alleviate poverty.

    Lastly, development of a poor economy is not only dependent on availability of capital. It depends on sound financial knowledge and acumen. Effectively, banking, investments, insurance along with credit have to be brought to the masses for the economy to really benefit the poorer business men and women.

    Overall it is a great write-up, and with time there will definitely be a clearer solution to help the capital hungry Assamese businesses.


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