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RM - PROPOSAL

“THE IMPACT AND AWARENESS OF MICRO-FINANCE IN

DEVELOPING COUNTRIES”

SUPERVISOR -
: Dr. VIJAY SHENAI

SUBMITTED BY -
: NIRANJAN ARJUNA SREERAMA
ID NO. : 0508KMKM1009

WORD COUNT : 2536

PAGES : 10

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TABLE OF CONTENTS

SL NO. PARTICULARS PAGE NO.

1 BACKGROUND - WHY DID I CHOOSE THIS TOPIC 2

2 LITERATURE REVIEW 3-6

3 RESEARCH PROBLEMS 7

4 METHODOLOGY 7

5 DATA 8

6 WORK-PLAN 8

7 REFERENCES 9-10

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1. BACKGROUND - WHY DID I CHOOSE THIS TOPIC ?

More than 2.7 billion people in the world live on less than $2 a day, as its
difficult for people in many poor countries to get access to conventional credit( SAP Online).
Micro-finance is one of the most effective models of delivering credit to the needy and
poor. Alleviation of poverty has been a very daunting and chaotic journey for many
Governments and Institutions fighting it. Hence, micro-finance has been a solution in many
a places in poverty alleviation.
"The poor stay poor, not because they are lazy but because they
have no access to capital".- Milton Friedman(Economist)
If we believe the above statement to be true, then we know that Micro-
finance is a key tool in providing that capital to the poor. Traditional banks and financial
institutions find it very difficult to deliver credit facilities to the poor as they incur very high
costs and thus is not feasible for them to be able to sustain this for a very long period.
Micro-finance doesn’t work in the traditional sense of these financial institutions and hence
they can deliver credit at a cost that is not very high and also is sustainable and profitable
for it to be scaled up.
I as a management student have always been intrigued by the way Micro-
finance can deliver a very low cost credit than compared to the traditional banks who have
years of experience and also management expertise that we feel is ideal for developing a
low cost model that could help them expand their customer base and also help in the
economic growth of the country. I am also very keen in learning the way in which micro-
finance has helped in poverty alleviation, empowering women and also promoting
‘ENTREPRENEURSHIP’.
It was this social impact nature of the ‘MICRO-FINANCE’ that drew me in
choosing such a topic.

2. LITERATURE REVIEW

A general perception is that the best method for alleviating poverty is

‘charity’. But as Nobel Peace Prize winner Mohd. Yunus says, charity increases the
dependency of the poor, and does not lead to their independence and financial growth.
What we can gather from this is that in order for the poor to become financially
independent, they need to have access to capital and many other financial services that
are mostly inaccessible to them. Since the current market structure is such that the cost of

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delivering credit to the poor is so high that commercial banks and many other financial
institutions have been hesitating in doing so.

In economics we learn that in order for a country’s Gross Domestic Product

to increase, three components are inter-related, demand, production and income. In most
of the developing countries there is an ever increasing population, which leads to increase
in demand, this increase in-turn leads to increased production, which leads to increased
income. And finally the increased income leads to increase in demand. This is a cycle,
which helps in improving the standard of living of people of the economy(Fig 1). But there
is also a problem in the developing economies, which leads to a break in this cycle. A huge
part of the population is unemployed and have very little income generation opportunities
and also no access to financial services. Micro-finance in a way tends to solve most of
these problems. Micro-finance provides micro loans to the needy at a competitive rate,
often less than the village moneylenders, and also commercial banks. This type of
providing small loans is meant to increase the lenders income by using the loan for income
generation purposes like starting small businesses or using it
to expand their existing ones by infusing capital. By doing this
DEMAND
micro-finance helps in increasing
demand, production and also income.

INCOME PRODUCTION

Fig 1 : GROSS DOMESTIC PRODUCT CYCLE

Source : http://www.economicswebinstitute.org/glossary/gdp.htm

One of the main strategies for micro-finance is the up-liftment of the

financially poor, improve their lifestyles and make them self sufficient. Poverty alleviation
has been a very tough and costly affair that many governments are finding it very difficult
to find ways to finance the projects. Many governments have implemented programs

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where the poor are thought certain skills in order to make them employable and also to
increase literacy rates of the poor. But the problem with these have been that though they
are now trained in certain skills, they are not able to find jobs. And since most of the rural
areas are lacking banks and other financial services, and many of the banks don’t provide
loans or do so with a very high interest rate, this is pushing them against taking financial
help and starting certain entrepreneurial ventures which could benefit them. Micro-finance
has helped in providing these people with loans and financial help by providing them at a
very competitive interest rates and also most often less than the traditional bank rates. By
doing so micro-finance has allowed in slowing alleviating poverty amongst the masses and
also helping them in building better life’s, and securing a safe future.
Micro-finance also does indirectly help in decreasing unemployment levels as
with more and more people who are taking loans from micro-financiers have started small
businesses, which require certain people to be employed for certain tasks and hence
micro-finance has been key in helping building up employment levels in rural areas.
Although certain economists do agree the above effects and impacts of
micro-finance, there are certain who don’t and have done certain studies to prove this. Lets
look at a few of them. One of the very early studies on the impacts of micro-finance were
that done by Hulme and Mosley(1996). These studies found that the only people to feel
the impact in a positive way were not the poor, but the ones who were not poor and
incomes above the poverty line. And one other bothering observation of the study was that
all borrowers who started with incomes below the poverty line actually ended up with less
incremental income after obtaining micro-finance, these were compared to a controlled
group who did not obtain loans through micro-finance. These studies had taken into
assumption that credit was the only factor involved in the generation of income.
One other key study by Banerjee(MIT) found out that most poor people do
not have the education, knowledge and experience to run and manage even the very
smallest of businesses. They often do businesses which are very risky and are always on
the back-foot as they dear of loosing every little asset of theirs and very often find it very
struggling to survive, although he says this does not mean they do not want to improve
their lifestyles.
In a 2007 study by Karnani, he summarizes it as most people do not have
the skill and vision and creativity to be entrepreneurs, and points out the fact that in most
of the developed economies with high levels of education and access to financial access,
almost 90% of the people are employees and not entrepreneurs.
Robert Pollin(2007), an economist has a view that says small businesses
run by poor people who lend from micro-finances are not simply going to be successful
because they have an increased opportunities to borrow, and for them to be successful,

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they need cost effective means of transporting goods to the markets, and also they
marketing help in reaching their consumers.
According to Sam Daley-Harris(2007), Director of the Microcredit Summit
Campaign,
“Micro-finance is not the solution to global poverty, but neither is health, or
education, or economic growth. There is no one single solution to global poverty. The
solution must include a broad array of empowering interventions and micro-finance, when
targeted to the very poor and effectively run, is one powerful tool.”

Many people who promote micro-finance do agree that its not the only way to
alleviate poverty, but when combined with other well developed poverty alleviation
schemes it could do wonders, as Professor Mohd. Yunus says
“Micro-credit is not a miracle cure that can eliminate poverty in one fell
swoop. But it can end poverty for many and reduce its severity for others. Combined with
other innovative programs that unleash people’s potential, micro-credit is an essential tool
in our search for a poverty-free world.”(2003)
But for micro-finance to really have a positive impact on alleviating poverty,
there need to be some sort of adjacent services in abundance to support the cause. And
some MFI(Micro-Finance Institution), and some Non-Government Organizations seem to
have understood the issue and have tried to bridge the gap by providing training in
entrepreneur skills and management to the poor. Some of these organizations also provide
education facilities for instance BRAC in Bangladesh. These are certain positive steps
towards alleviation of poverty.
But until now all these organizations were mainly and centrally focussed on
only one aspect of the whole system that is supply, and very little or no attention has been
paid to the demand side of things. By providing means to starting and running small
businesses, micro-finance does not ensure the successful running of the business, and for
that to happen there has to be a sizable population of decent earning capacities who could
consume certain amount of goods and services provided, thus helping in sustaining the
business, thus for having a successful business its essential that there is enough earning
opportunities or jobs available for the local population.
As noted by Batemen and Chang(2009), they say that micro-finance
doesn’t take into account the fact the role played by scale economies. They say micro-
finance just provides an over-supply of inefficient number of small businesses, and ignore
the efficiency of Small and Medium Enterprises(SME). This they say would result in
extreme competition that would force small businesses to survive by enforcing cost-cutting
strategies, which in the short run would take away crucial share of the market from the

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SME’s, and this would lead SME to cut unit costs and get higher productivity in the long-
run. And also the fact that credit is no longer an issue with micro-finance helping out, there
could be faster saturation in the domestic economies and thus hamper sustainable growth
for the economy as a whole.
In a study conducted by the World Bank, between 1991-92 and 1998-1999 in
Bangladesh, they found that micro-finance would provide just marginal increase and that
they say proves that micro-finance does not live up to the hype. But can these be attributed
to any thing other can micro-finance, in Andhra Pradesh(INDIA), the social indicators of
development have proved to be much higher than the rest of INDIA, where Micro-finance
seems to have played a crucial role.

3. RESEARCH PROBLEMS

Many of the previous studies or researches have been made just on financial
impact of micro-finance, there are very less studies or research done on the social impact
of micro-finance. One case that all promoters of micro-finance are pushing is the social
effect it will have on the poor and how good this opportunity will be to their lives in securing
a good financial security. But this aspect have not been scrutinized properly.
One of the biggest areas which have not been covered in many studies have
been the demand side impact of micro-finance, all of the interest and eyes have been on
the supply side and availability of finance to the poor. But the fact that demand side factors
have a crucial role to play in the success of businesses run by the poor with the help of
micro-finance, and hence I would like to cover this area of micro-finance and impact of it in
the real world. There have been many studies which have been done where they have
found very less or no impact of micro-finance and some even argue that this leads the
poor in bury themselves in more and more debt. What I would like to find and prove is the
fact that many of the MFI’s have extra-ordinary repayment rates of above 96%, this would
not be possible if they had a positive impact of the infusion of capital through micro-
finance, and also the fact that many villages in Bangladesh, India, parts of African
countries have been able to bring people out of poverty with the help of micro-finance
schemes and hence these are some of the research problems I would like to cover.

4. METHODOLOGY
Research methodology is a way of one conducts the research in order to
come to a particular conclusion. It can also be stated as a system of methods followed in a
particular discipline(elook dictionary online). As one of the dictionaries online states it, it’s a

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diligent and systematic inquiry or investigation into the subject in order to discover/revise
facts, theories, applications etc(Dictionary online).
In my study I will be researching on both social and financial impact of micro-
finance, for that to happen I will be analyzing data from various sources that are related to
consumption, supply and demand of goods and services provided by the micro-enterprises
set up by the poor. Also I will be analyzing this data with the local earning opportunities as
these are closely related and have a effect of the success of the businesses. By doing this
I will be able to bring about a relation between the success of a business and these
external factors. I will also be analyzing the effect between female and male lenders and
see if there is a difference between them through some available data and see if the fuzz
about women empowerment is true. By analyzing all these I will be able to conclude of the
impact of micro-finance on poverty alleviation, women empowerment, SME’s etc.

5. DATA
Data refers to that information which helps one in going on with the research
by which he will be able to analyze, come to conclusions. There are basically two types of
data namely, quantitative and qualitative. Quantitative data refers to the statistical part of
the research, which is data in the form of numbers. Qualitative data refers to theoretical
hypothesis, which have been done before by various recognised personalities and thus
refers to qualitative.
In this study for the purpose of conducting my research I will using
quantitative data from sources like government research and surveys, statistical reports of
MFI’s, data procured by previous researchers in the recent past.
Qualitative data such as present hypothesis from various economists,
financial guru’s, financial theories of various economists etc. will be considered to help in
conducting my research in either proving that some are wrong or in some assisting me in
proving my point.
For this data will also be collected from various journals, university
researches, internet sources.

6. WORK-PLAN

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WEEK WEEK WEEK4 WEEK 6- WEEK WEEK 10-

1-2 2-4 -6 8 8-10 12
ACCESS TO
DATA

LITERATURE
REVIEW

DATA COLLECTION

DATA ANALYSIS

FIRST DRAFT

SECOND DRAFT

FINAL DRAFT

DISSERTATION
SUBMISSION
DUE

REFERENCES

• Friedman, M. (NA). Helping the Poor Liberate Their Families From Poverty. Available:
http://www.visionfundinternational.org/VisionFund/VisionFundweb.nsf. Last accessed 20th
July 2010.

• EXPLORE THE WORLD OF MICROFINANCE WITH SAP BUSINESSOBJECTS

EXPLORER. Available: http://www.sap.com/solutions/sapbusinessobjects/business-
intelligence/search-navigation/explorer/explorer-accelerated/microfinance.epx. Last
accessed 20th July 2010.

• Devnath, A. (NA). Yunus explains his concept in an exclusive interview with The Daily
Star on the eve of Social Business Day. Available:
http://www.muhammadyunus.org/Yunus-Centre-Highlights/social-business-a-solution-to-
ills/. Last accessed 22nd July 2010.

• Piana, V. (2001). Gross Domestic Product. Available:

http://www.economicswebinstitute.org/glossary/gdp.htm. Last accessed 23rd July 2010.

• Hulme, David, and Paul Mosley (1996). Finance Against Poverty. Routledge, London.

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• Banerjee, Abhijit, Esther Duflo, Rachel Glennerster and Cynthia Kinnan (2009) “The
Miracle of Microfinance? Evidence from a Randomised Evaluation” Department of
Economics, Massachusetts Institute of Technology (MIT) Working Paper. Accessed on 24th
July 2010.

• Karnani, Aneel (2007). “Microfinance Misses its Mark”. Stanford Social Innovation
Review. Accessed on 24th July 2010.

• Pollin, Robert (2007). “Microcredit: False Hopes and Real Possibilities”. Foreign Policy
Focus,http://www.fpif.org/articles/microcredit_false_hopes_and_real_possibilities.
Accessed on 25th July 2010.

• Daley-Harris, Sam (2007). “Debate on Microcredit”. Foreign Policy in

Focus,http://www.fpif.org/articles/debate_on_microcredit. Accessed on 25th July 2010.

• Yunus, Muhammad (2003). Banker to the Poor: Micro-lending and the Battle Against
World Poverty. Public Affairs, New York.

• Bateman, Milford and Ha-Joon Chang (2009), “The Microfinance Illusion”,

http://www.econ.cam.ac.uk/faculty/chang/pubs/Microfinance.pdf, Accessed on 27th July
2010.

• World Bank (2008). World Development Report, 2008. The World Bank, Washington DC.

• Petra Christian university. (NA). Research Methodology. Available:

http://digilib.petra.ac.id/viewer.php?
page=1&submit.x=0&submit.y=0&qual=high&fname=/jiunkpe/s1/hotl/2008/jiunkpe-ns-s1-
2008-33403003-9666-food_lucky-chapter4.pdf. Last accessed 2nd August 2010.

• Choudary, A. (2009). Microfinance as a Poverty Reduction Tool. A Critical Assessment,

2-8.

• Kristof, N. (2009). The Role of Microfinance. Available:

http://kristof.blogs.nytimes.com/2009/12/28/the-role-of-microfinance/. Last accessed 4th
August 2010.

• Katz, Rob. (2007). Microfinance: Good for Growth, or Overblown?. Available:

http://www.nextbillion.net/blog/2007/03/07/microfinance-good-for-growth-or-overblown. Last
accessed 3rd August 2010.

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