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Microfinance: An Economic Analysis

July 25, 2010  by: coooooolsid  Points: 15   Category: Money Market  Earning $0.65   Views: 1134

Microfinance is emerging as a powerful instrument for human development. It has not only increased the saving habit but also helped reducing the intensity of poverty .Further, it is helpful in removing illiteracy and people become health conscious.

         

Introduction


Rural finance is a matter of great concern in an agrarian economy like India where more than 70 per cent of the population lives in rural areas and depends mostly on agriculture for their livelihood.40 percent of our GDP is contributed by the rural sector. Rural development of our country can be achieved only with upliftment of the rural folk consisting of poor farmers, agricultural labourers, artisans etc. Since agriculture is overcrowded and little hope of absorbing burgeoning population, they are to be engaged either in industrial or in other commercial activities which warrants financial investment. Finance being the life blood of any commercial venture, availability of adequate funds at reasonable terms is a must to ensure rapid economic development. It is now realised that micro finance plays a significant role in financing the target group members of which are living below poverty line.

Micro finance is a new invention and is of recent origin. Though there is no statutory definition for micro finance, the task force on Supportive Policy and Regulatory Framework for Micro finance has defined micro-finance as under:

Provision of thrift, credit and other financial services and product of very small amounts to the poor in rural, semi-urban, or urban areas for enabling them to raise their income levels and improve living standards.


The term 'Micro' literally means small. But the Task force has not defined any amount. However, as per the Micro Credit Special Cell of the Reserve Bank of India, the borrowable accounts up to the limit of Rs 25000 could be considered as micro credit product and which roughly equals to US$ 500 a standard for South Asia as per international perception.

The term micro finance and micro credit are often used interchangeably, but it is important to high light the differences between both terms. Micro Credit is defined by the Grameen bank, symbolises small loans extended to the poor for undertaking the self employment projects that would generate income and enable them to provide employment for themselves and their families. These loans are generally offered without any collateral security.

On the other hand, micro finance is a financial service of small quantity provided to entrepreneurs, particulars women micro entrepreneurs, from low income households. These financial services may include saving, credit, insurance, money transfer etc i, e, any type of financial services provided to the customers to meet their financial needs with the only requirement thqt transaction value is less and customers belong to the poor Strata of the society.

After the great success of the Grameen Bank of our neighbouring country Bangladesh, the concept of micro finance has gained momentum. Hence micro finance is a provision of thrift, credit and other financial services and product of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve the living standards. According to the United Nations in 2002 almost one fifth of the world population (i.e. 1.3 billion people) was living in extreme poverty, earning less than one dollar per a day.

Micro finance is being considered as an important poverty alleviation tool all over the world. The attention of micro finance and its role in reducing poverty was further increased when Mohammad Yunus received the Nobel Prize for peace in 2006. According to him the poor themselves can create a poverty free world and credit can create self-employment instantaneously.

In India, micro- credit programmes are implemented through group structures; which are known as Self Help Groups. A Self Help Group has been defined as a small and informal association of poor having preferably similar socio economic background and who have come together to realize some common goals based on the principles of self-help and collective responsibility. SHGs become relevant because of the following reasons. First, an SHG working on the principle of solidarity helps the poor to come together to pool their savings and access of credit facilities. An SHG by tapping social capital like trust and reciprocation helps in replacing physical collateral, a major hurdle faced by the poor in obtaining formal credit. Then through the principles of joint liability and peer pressure, an SHG ensures prompt loan recovery from the members. In the process, an SHG helps the poor, especially women, to establish their credit worthiness.

Objectives


With this background the present paper is a modest attempt to study the impact of micro finance on human development with the following objectives;

1. To assess impact of microfinance on generation of income and employment.
2. To assess the impact of micro finance on health and education.
3. To investigate the problems associated with the implementation of micro finance related schemes and to suggest measures to overcome it.

Materials & Methods


The present work makes use of primary data. Information relating to economic activities, amount of loan, man days created, income, utilisation of income on education and health etc were collected through structured schedules from 202 members spreading over 16 SHGs in Satyabadi block of Puri district. The information collected refers to a period of 12 months i, e, from January 2008 to December 2008. The groups were selected on the basis of a simple random sampling method.
Simple statistical tools have been used for comparative analysis and interpretation of the results.

Results & Discussion


a. Purpose wise finance: Table-1 shows that out of 202 members 79 members are engaged in agriculture which is 39.11%, in Dairy 72 persons are engaged which is 35.64%. So in agriculture and Dairy, most of the people are engaged. Thereafter, 20 members are engaged in Rope making which is 9.9%, 15 members are engaged in Business, 14 members are engaged in tailoring and only two members are engaged in flower vending activity. But in agriculture the average loan amount per member is Rs 7000. Further, these members have received loan for allied activities like diary and flower vending to the average amount of Rs 13500 and Rs 4500 respectively. It is also found that these members have received loans for non-firm activities like tailoring and business where the average loan amount per member is Rs 6000 and Rs 8500 respectively. But in general the average loan amount is Rs 8938.12.



b. Employment Generation: No doubt, any financial assistance if utilised properly generates gainful employment opportunities in the rural economy. It was observed in the field survey that the sampled members also get gainful employment opportunities. Table-2 shows that the average employment before SHGs was 111 days and in post-SHGs the average employment is 154 days making a growth of 38.74%. But the growth percentage differs from activity to activity. Although in flower vending activity the growth rate is 100% which is proved efficient yet, the number of members engaged in that activity is very negligible. In Dairy and business activity growth rate is 52.38% and 56.52% respectively. Then in tailoring and rope making the growth rate is 31.58% and 30% respectively. Lastly, in agriculture the growth rate is 22.95% which is lowest. But agriculture cannot be neglected because maximum number of individuals is engaged in it.



c. Income Generation: There is a symbolic relationship between generation of income and employment opportunities. It seems the loans provided by SHGs had a favourable impact on generation of income in the sample selected. Table-3 makes an attempt to explain the impact of loans provided on generation of income. In Table-3, the average income in pre-SHG was Rs 8108.42 and in post-SHG, the average income is Rs 12274.75 making a growth of 51.38%. So on an average each selected member could get an income of Rs 12274.75 which can bring the poor people above poverty line though it is not sufficient.



d. Use of Income generated: Generally it is assumed that whenever people are able to receive some extra income, they usually invest it productively towards the improvement of the quality of their lives. It is true that income has a favourable effect on consumption expenditure in general and on education and health in particular. The opinions recorded from sampled beneficiaries also proved true in rural areas. Table-4 illustrates the favourable qualitative shift.



The opinions of sample respondents revealed that they productively made use of the income generated after receiving the loans. 39.11% of the respondents reinvested their income on different activities in which they were engaged. 27.23% of them revealed that a part of the income generated was utilised for educating their children, and 20.30% of them spent it on health care. 13.37% of the respondents told that income generated was spent for meeting the household expenditure.

In general, the field experiences revealed that the micro finance provided to SHGs is productive enough and had a favourable effect on employment and income generation. It is also observed that the credit extended to rural women also had a quality improving effect on the families of sample respondents, because majority of the women beneficiaries utilised the income generated either for investing or improving the educational and health requirements. These expenditures resulted in qualitative improvement of human resources which is otherwise known as human development.

Observations and Findings


The functional analysis of the Self Help Groups in the study area reveals the following observations and findings:

1. The rural women have successfully demonstrated how to mobilise and mange thrift, appraise credit needs and enforce financial discipline.

2. It is found that though there is increase in income and employment, it has helped to reduce the intensity of poverty but not has been able to alleviate poverty.

3. The social outlook of women has undergone a beneficial change and some degree of transformation of social outlook is found. On social development the women need further exposure. The changes that have occurred between pre and post stages are encouraging but not adequate.

4. There was a sense of equality of status of women as participants, decision makers and beneficiaries in the democratic, economic and social spheres of life and sensitised the women members to take active part in socio-economic progress of rural area.

5. The rate of illiteracy can be further reduced through existing programmes. Formal education with focus on critical issues should be imparted to the women groups so that they can manage their group affairs independently.

6. Periodical training at regular intervals to group members and self management issues is to be necessarily imparted with the help of experienced resource persons.

7. Change of leadership is a must for sharing the responsibilities by all the members and generates leadership qualities in each member.

8. SHGs services can be utilised to fight against the social evils like child labour, dowry, to promote small family norms, and in other social works.

Conclusion


Micro credit is emerging as a powerful instrument for human development. It has not only increased the saving habit but also helped reducing the intensity of poverty .Further; it is helpful in removing illiteracy and people become health conscious. The SHG-Bank linkage programme has offered greater opportunity for closer interaction between bank and group members. As a result, the SHG has helped the poor masses in earning their living, generating self-employment and maintaining their living standards. No doubt, the state Govt., banks and NGOs have helped a lot in promoting SHGs. But to make the SHGs movement really meaningful and successful, the Governments at different levels have to intervene in a large scale not as financier or provider of other inputs but as facilitator and promoter. Unless and until these functionaries serve the rural poor with urge and devotion, these institutions may fail to achieve the success of human development.

Reference


Chadrakavate( 2006) "The SHGs model of Microfinance: A Salient Movement Towards Empowering Rural Women" Southern Economist, Vol.44,No.17,pp.29-32.




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