REVIEW OF MICROFINANCE ARTICLE

By Anil Kumar Sahu (B. Sc. Ag. & M. Sc. ICT-ARD)

1. Is microdebt good for poor people? A not on the dark side of microfinance
By David Hulme

Most MFIs are involved in disbursing loans and their savings services are designed as a
means of collateralizing loans and providing low-cost capital; they are not designed to
meet the Poor’s need for savings mechanisms. Such types of loans are usually come
under ‘microcredit’ and MFIs have created the myth that poor people always manage to
repay their loans because of their ability to exploit business opportunities. This is
nonsense and Von Pischke’s dictum that we should call microcredit’ microdebt’ can help
us be more realistic about the different ways in which loans can impact on the livelihoods
of the poor people.

Microdebt has great potential and opportunities for the poor people to utilize the funds of
money to uplift the income, increase the socio-economic status and reduce the
vulnerability. But not all microdebt produces favorable outcome, particularly poor people
who are low income in saturated market that are poorly developed and where
environmental and economic shocks are common like drought, flood, sickness, etc. There
are lacking in skills and knowledge of poor people and they are not able to take decision
either bad or good and a proportion of poor borrowers encounter great difficulties in
repaying loans.

MFIs have a solution for that and they can overcome with ‘social support’ in some
painless way, this is often not the case –talk to the drop-outs of MFIs! In Bangladesh,
MFI debtors have been arrested by the police, are threatened with physical violence
(Montgomery, 1996) and the press regularly report female suicides resulting from
problems of repaying loans. Many poor people are very frightened about getting into
debt; this is a rational response to the danger that arises from indebtedness to MFIs and
not a ‘Misunderstanding’.
Microenterprise lending like school fee, cope with medical shocks and vulnerability
(Rutherford, 2000) has become a mile stone in the evolution of MFIs as an industry and
they provided service to poor people who match with client needs. Some of the countries
like Kenya where there is women’s finance trust who wishes to make saving and some
how found that the saving account is greater than the loans account, but the microfinance
industries tries to force every saver4 also to be a borrower. The viability of Microfinance
industry depends on the loans portfolio while savings products are not designed to cover
costs.

The effective MFIs such as Grameen Bank n Bangladesh who provide services that help
poor people to improve his prospects and quality of life and reduce their vulnerability.
However, the claims that microfinance assists ‘the poorest ‘and the poorest of the poor’
are unfounded within national contexts. MFIs virtually never work with poorest who are
mentally and physically disabled, the elderly children, the destitute and refugees and
many MFIs (like in Kenya and Uganda) have high proportions of clients who are non-
poor, if one takes official national levels of the poverty line as the criteria. There is a
common assumption about microfinance that they are working with the poor and poorest
people needs to be dropped, unless MFIs can provide clear evidence that this is the case.

MFI and donors has been created impression that microfinance is a cure for poverty. This
is a potentially dangerous statement as it distracts attention from the fact that poverty
reduction requires action on many fronts: social safety nets for the poorest and most
vulnerable, an effective education system, and low-cost and reliable health services,
governments that can provide social inclusion and sound macroeconomics policies, and
many other issues.

Providing effective microfinance services to poor people is part of a poverty-reduction

strategy, but only a part. Those who present microfinance as a magic bullet to reduce
poverty provide such a simple message for policy formulation that they encourage it to be
simple-minded.
Understanding of poverty reduction will be illustrating the feasibility of creating MFIs
that can approach sustainability and provide valued financial services to poor people.
Microfinance promotes group-based microenterprise loan products and is obstructing the
development of the full range of services and products that poor people wan and need:
flexible savings, contractual savings, loans for education and health, microinsurance and
lines of credit.

In 1990s have been regarded as ‘Decade of Microcredit Complacency’. It is time to

stocktake, to stop recycling myths, to stop copying the initial breakthrough products and
to focus on the real job in hand: developing institutions that can create and provide the
broad range of microfinancial services that will support poor people in their efforts to
improve their own and their children’s prospects

1.1 Review

What Halme had told in article is 100 per cent relevant. Actually MFIs which is working
in independently without government regulations they are instead of helping the poor
they exploiting them. MFI charging more interest rate they are not giving flexibility in
loan means the poor can not be diverted the loan in the areas there urgent need like
medicine, food in drought period. The second problems with poor are they do not have
facility to save their daily small amount. Instead of taking credit saving is more important
with poor downtrodden people and because of these they either spend this money in some
good ways or spent it in bad vices, so until and unless poor will support with shocks,
seasonality, and provided loan at very cheap rate they can not come out of vicious cycle
of life.

2. Microfinance and farmers: Do they fit? By Malcon Harper

‘New paradigm’ of microfinance has been replaced the concept of old style rural finance
which mainly subsidized low-cost farm credit. The ‘old paradigm’ rural development
financial institutions have often disappeared, and others have been converted into what is
effectively specialist microfinance MFIs.

Farming is defined as the cultivation of crops, and animal husbandry of any kind is
excluded. Uses of microfinance in ‘new paradigm’ are not limited to animal husbandry
but also for crop cultivation. The communities-owned village banks and cooperatives
constrained by their lack of funds (Klein, 1999) and few NGO MFIs are engaged in crop
lending (Coffey, 1998).

MFIs who financed for crop cultivation like Basix in India, have poor experience with
this kind of loan (DiLeo, 2003) There are fundamental difference between farming and
other income generating activities, which may affect the match between microfinance and
the farmers needs. These include the following:-
• Most farming products are themselves a means of survival. They can be eaten
as well as sold.
• Farming tends to be an ancestral activity. Most small scale farmers are
following their parents’ footsteps and farming it is not new to them.
• Many (but not all) farmers already own the basic asset required for farming,
which is land. They do not have to finance its acquisition.
• Land is traditionally the most acceptable form of collateral, as well as being
basic to farming.
• Farming land, unlike most other assets, usually increase in value in the long
term, but in the short term it declines in value if it is not used. Its value can
also be reduced through overuse or misuse, but if I am used at all the owner
must usually invest heavily in bringing it back in to production. This does not
apply to land used in shifting cultivation, but this type of land use is not the
dominated method in most regions.
• Most farming families live on the land that cultivate; it provides space for
shelter as well as for cultivation.
Typical uses of microfinance are:
• Consumption credit for medical care in case of sickness;
 • Petty trade, dealing in consumer goods, often from home or as a mobile
peddler;
• Livestock, the purchase of a dairy cow;
• Seasonal crop finance, for farm inputs;
• On farm investment, for minor irrigation.
Rural people’s livelihoods have diversified, in part thanks to microfinance, but farming is
still the most important single source of income for most rural people, in kind and in
cash. Farming financing is required specialist technical skills.

A recent CGAP (Christen and Pearce, 2005) lists 10 features that can make microfinance
more suitable for farmers, but they do not include lower interest rates. In fact ‘old
paradigm’ agricultural finance schemes are by implication criticized for attempting to
charge interest rates that are ‘affordable related to the rate of return on agricultural
investments’.

The interest rates charged by MFIs are higher than the usual commercial bank rates, and
it is presumably believed that the rates of return that client will earn by investing the
borrowers funds will be higher still, so that their net income will be increased.
Microfinance is generally more expensive than traditional formal institution credit
because of the high transaction costs that have to be incurred to provide the accessibility
and other service characteristics that have been shown to be more important to poor
people than the rate of interest they have to pay. These interest rates are usually lower
than moneylenders’ rate, which are most microfinance customers’ only alternative, but it
is also important to be sure that the returns on their investments are sufficient to cover the
interest costs.

The Mix Market Bulletin (2006) gives a range of yields on portfolio for microfinance
institutions. The average nominal rate for all MFIs is 38.1 per cent, and there is come
variation when the figures are disaggregated by types of institution. The average rate for
NGO is 43 per cent for community owned institutions it is 29 per cent and for banks it is
31 per cent.
MFIs should set their prices not only by calculating what their cost are, but by assessing
what their customers can afford to pay. The competition is still usually the moneylender,
whose rates have often come down in recent years, in part because of competition from
MFIs, but moneylender interest rates are still well above most MFI rates.

Rates of return generally decrease as the scale of investment increases. A rickshaw puller
can earn a higher percentage return on his investment in the rickshaw than a taxi driver
can earn on his car, and a tailor can earn a larger proportionate return on the cost of her
treadle powered sewing machine than an investor can make on her investment in a
garment factory. Similarly, if it is possible to compare the returns on farm and non-farm
investments of similar scale. If investments in farming yield a generally lower return than
investments of similar amounts in what has come to be know as ‘the non-farm sector’,
then may be one explanation for the fact that most microcredit is used for consumption or
for non farm activities.

Indian cases predominate, but this may not be unreasonable in the light of the fact that
some 700 million Indians live and work in rural areas, of which most are very poor by
any standards. This article has only dealt only with interest rates and rate of return; issue
such as cash flow, risk or gender have not been covered. A number of microfinance
institutions such as Basix Finance are also pioneering new forms of protection against
crop failure in order to reduce the risk of non-repayment.

There have a number of innovations in farming system and technologies, such as the
irrigation treadle pump, pioneering in Bangladesh and India, and lower risk crops,
integrated pest management using less imputes, and new technologies that are under the
control of women. Some of these increase rates of return while others reduce the amounts
needed for investment.

MFIs need to be more efficient and reduce their costs. The pressure to date has been for
MFIs to achieve ‘sustainability’. For a finance services business, this presumably means
profitability, include some return on equi8ty. MFIs have only reached 10 per cent or less
of the potential microfinance market in most countries, and moneylenders and other
informal credit supplier are still their main competition.

2.1 Review

Microfinance and farmers, definitely fit each other. According to Harper the new concept
of microfinance have the revolutionized the rural world. Previously microcredit was
given by credit institution, cooperatives and moneylender. Lot of non farm activity has
been kept as financial exclusion. So in current scenario the NGOMFIs have brought all
these unorganized non farm activity like animal husbandry, embroidery tellering, cottage
industry, basket weaning etc. into financial inclusion.

3. Microfinance: Some conceptual and methodological problems by David Ellerman

Microfinance has grown into a major ‘development solution’. And now the success story
has been crowned with the Nobel peace Prize for Muhammad Yunus and Grameen Bank.
Yet microfinance is not without controversy Microfinance might be useful compared to a
more recent development fad, social funds, which also got quick gratifying results. A
loan made to a poor country to establish a social fund at the national level that will then
make a gift for local infrastructure to qualifying jurisdictions. Microfinance has even
more endearing characteristics than social funds, and thus the appeal of microfinance has
certainly been more enduring. It is a programme that targets the poor and seems to
provide a certain measure of poverty alleviation. It seems to be associated with enabling
entrepreneurships and business development so that poor people can then provide for
themselves. Commercial sustainability is the mother of all development fads and, thus, it
is an appropriate topic for some critical examination.

Genuine development assistance, where the helpers do not crowd out and undercut the
agency of the doers, is a slow, subtle and painstaking process. The political leaders and
the donors to ‘do more’ to help the poor and to ‘do it quickly’ because thing are getting
worse. The activity of microfinance organizations are described as funding
‘entrepreneurship’ by the poor when the bulk of loan seem to fall into the category that is
better described as consumption smoothing.

It is now common place that donations of food surpluses from the north to ‘feed the poor’
in the south may well end up-in spite of the superficial appeal to ‘helping the poor’ –
undercutting the struggling farmers in the south so that the south becomes even less able
to feed itself. Microfinance programme may be like fast-growing weeds that will choke
the ground before the slower 9’development-oriented’) crops can grow.

Thus the rush to do good with pre-packaged and easily-installed microfinance

programme may well be another form of unhelpful that has untoward longer-term effects
on the supposed beneficiaries. In this sense, microfinance may be and anti-development
intervention.

Evaluation is a part of the learning process has been taken to whole new level-impact
evaluations. Impact evaluation have become a fad in their own right and are now
entwined with microfinance as a means to help sustain porgrammes that have little if any
development effectiveness.

Evaluation is something only determined by considering its costs, which entails

comparing it to alternatives. One of the basic concepts in economics is the notion of
opportunity cost. A genuine evaluation should be seen as an integral part of the process of
social learning.

The general evaluation design is a matched comparison between social fund communities
or beneficiaries and others with similar characteristics that did not implement a social
fund project (Social Protection Unit, 2000). The World Bank uses evaluations to evaluate
not just its social fund projects but also its microfinance programme. World Bank
Development Economics Department has launched a major initiative to promote impact
evaluations themselves as the ultimate low-hurdle way to evaluate development
prgrammes.
The World Bank often tries to legitimate its leading role by citing its unique standpoint to
scan the whole world for alternatives and to ascertain; best practices’. Yet after decades
of failure, it has decided that the best way to evaluate its development programmes is not
to compare them to all the actual alternatives that might be undertaken with the same
considerable resources but to compare them to ‘a hypothetical situation that would occur
in the absence of the program’.

3.1 Review

A development fad has to show the growth with sustainability means no damage or
harmful effect on our future generation. Microfinance may development fads for the poor
people and there should no intervention of local ruling group. Microfinance should be
dependent on the basic needs of the poor people rather that MFIs need. Ellerman focuses
on the social fund that can be utilized for better education, health care, water supply but
they do not discuss about non material aspect of poor people. They are discussing about
the physical aspect of life so we can not tell that poor people will have the well being of
life or people have developed quality of life without considering the non material aspect
of poor people that means we have to consider the inner aspect of life of poor people. So
there should be multiple aspects or multiple dimension approach for better life of poor
people. I agreed the concept of Ellerman about the entrepreneurship and business
development that is very innovative for poor people so that they can established own
enterprise for alleviating the poverty of poor people and it leads to sustainable
development of poor people. Economic development is also a major tool to relief the
poverty. I favor the concept of ‘humanitarian relief’ either natural or human disaster.

Ellerman emphasized of the entrepreneurial knowledge, skill, opportunities to start

business if they have facility of finance and under the guidance of MFIs and regular
monitoring of business so there will lesser chance of risk. I agreed with Ellerman that
only sustainability is not an issue but an issue as to whether or not that sort of
development assistance should be sustained. There is requirement of the building
capacity to the poor people.
There is some concept in the mind of people or MFIs that MFIs are helping the poor but
instead of reality helping the poor to become the agents or doers of their own
development. Ellerman emphasized on the cooperative but cooperative are very biased to
rich, well being person and politicians and very less interference of poor people. So there
should be a cooperative like structure (SHGs) and all member should come under same
economic status and homogenous in nature. Microfinance organization should finance
bulk funds for poor who want to establish small enterprise so that do not captured by
moneylender and enterprise should be in group rather than individually.

According to Ellerman microfinance acts as a weed because it grows very fast like
weeds. He told about the different types of evaluation like ‘impact evaluation, positive
evaluation, and test analysis for any organization that will give better result for proper
functioning of any organization. They also emphasize on the training the poor people that
will develop the skill to empower his/her self. Microfinance organization is based on the
opportunity cost that means alternatives over the best possible solutions.