A Research Proposal

on

Feasibility of

Microfinance in semi-urban area

Submitted to

LOVELY PROFESSIONAL UNIVERSITY

in partial fulfillment of the requirements for the award of degree of

MASTER OF BUSINESS ADMINISTRATION (HONS)

Submitted by:

Sandeep Singh

Regd. No. 10902110

Supervised by:

Mrs Suruchi Juneja

Assistant Professor

LOVELY HONOURS SCHOOL OF BUSINESSLOVELY PROFESSIONAL UNIVERSITY

PHAGWARA2010

0

Contents

Sr No.   Page No

1 Introduction to Microfinance 2

2 Literature Review 5

3 Need of the Study 12

4 Objectives of the Study 12

5 Research Methodology 13

6 Tentative Chapter Scheme 13

7 References 14

1

1. Introduction to microfinance

Microfinance can be defined as financial services targeting and catering to

clients who are excluded from the traditional financial system on account of their lower

economic status. Microfinance can include micro-credit, micro-savings, and micro-insurance

and payment services.

Microfinance serves a totally different client segment, which is poor, they have to

address the challenges that arise from their clients dire circumstances. Few challenges that

any poor faces are health, lack of housing, lack of education, access to basic necessities, and

unexpected threats such as natural disasters that endanger their lives. Influence of these

factors on individual’s economic ability cannot be ignored. MFI Products focus on these

kinds of issues to reduce poverty.

Activities of Microfinance

Microcredit: It is a small amount of money loaned to a client by a bank or

other institution. Microcredit can be offered, often without collateral, to an

individual or through group lending.

Micro savings: These are deposit services that allow one to save small

amounts of money for future use. Often without minimum balance requirements,

these savings accounts allow households to save in order to meet unexpected

expenses and plan for future expenses.

Micro insurance: It is a system by which people, businesses and other

organizations make a payment to share risk. Access to insurance enables

entrepreneurs to concentrate more on developing their businesses while mitigating

other risks affecting property, health or the ability to work.

Remittances: These are transfer of funds from people in one place to people in

another, usually across borders to family and friends. Compared with other sources of

capital that can fluctuate depending on the political or economic climate, remittances

are a relatively steady source of funds.

2

The clients of Microfinance

The typical micro finance clients are low-income per sons that do not have access

to formal financial institutions. Microfinance clients are typically self-employed, often

household-based entrepreneurs. In rural areas, they are usually small farmers and other s

who are engaged in small income-generating activities such as food processing and petty

trade. In urban areas, micro finance activities are more diverse and include shopkeepers,

service provider s, artisans, street vendors, etc. Micro finance clients are poor and vulnerable

non- poor who have a relatively unstable source of income.

Microfinance service providers in India

Informal Sector: money lenders, pawnshops, loans from relatives, friends, etc.

NGO, MFI’s: these extend microfinance to poor by forming Groups. E.g. Grameen

model

SHG-Bank Linkages: could have an NGO as an intermediary.

The two models of group lending

JLG (Joint liability group).

SHG (Self help group).

JLG (Joint Liability Group): Potential clients are asked by the MFI to organize themselves

into groups. The members individually make regular savings and take regular loans. They

each have individual savings and loan accounts. This model is pioneered in Bangladesh and

is based on Grameen bank model. The main purpose of JLG is to facilitate mutual

guaranteeing and execution of a joint liability making members jointly liable for interest

payment + loan repayment obtained from MFI.

SHG: The group formation process may be facilitated by an NGO or by a bank itself.

Members start making individual savings and lend by earning interest decided by the group.

SHG opens a savings account with bank to deposit the savings and soon qualifies to take

loans. This loan is used by the group to supplement its own funds for on lending to its

members.

3

Nearly 30% of the Indian population lives in urban areas, only 5% of all microcredit

in India goes to the urban poor. However, the potential of urban microfinance is huge; the

urban population is expected to increase to 50% of the total population by 2030. The Centre

for Micro Finance conducted several cases studies on urban MFIs. The case studies revealed

that the urban market poses different demands and challenges compared to the rural sector,

which probably contributes to the sectors' slower growth.

Micro Financing has great scope in India especially in developing semi-urban

areas like some area of Jalandhar, because many of the people don’t have high income

resulting in low purchasing power and Micro Finance institutions target market as low

income group and it is common impression is that the poor people need and use a variety of

financial services including deposits, loans etc.

From the above given facts and figures we can analyze that although we have huge

number of urban poor in India but still the only 5% of all microcredit goes to the urban poor.

So my study is completely based on finding the feasibility of the microfinance in the semi-

urban areas.

4

2. Literature Review

Rahman (2010) investigates the consumption behavior of borrowers of two major

microcredit in Bangladesh and compares that with non-borrower s. Primary data has been

collected from borrowers of the Grameen Bank and Bangladesh Rural Advancement

Committee (BRAC) operating in three major districts in Bangladesh. Along with borrowers,

non-borrowers data has also been collected from non-program village. Control-group

method (non- borrowers from non-program villages) has been used to compare the

differences in method (non- borrowers from non-program villages) has been used to compare

the differences in monthly expenditure and other household characteristics on the budget

share of eleven items (food and non-food) consumed by borrowers and non-borrowers.

Results from the estimation on linear and quadratic model suggest that borrowers of

microcredit programs are better off in terms of consumption than non- borrowers.

Shoji (2010) stats that Microfinance’s in Bangladesh introduced a contingent repayment

system beginning in 2002, which allowed rescheduling of savings and installments

during natural disasters for affected members. This paper is one of the first attempts

to evaluate the system employing a unique dataset. In using evidence from a flood in

2004, the author found that rescheduling plays the role of a safety net by decreasing the

probability that people skip meals during negative shocks by 5.1 per cent. This effect is even

higher on the landless and females. This study attempts to contribute to the issue regarding

the poverty reduction effect of microfinance’s.

Rahman, Bhuyan Vaziri. (2009) has stated that Microcredit program in Bangladesh

provides small loans to rural people especially to women with the purpose of eradicating

poverty. This study investigates the impact of microcredit on consumption pattern of

borrowers and compares if the impact is the same for non-borrower s Primary data has

been collected from the Grameen Bank and the Bangladesh Rural Advancement

Committee (BRAC) borrowers of some selected villages from three major districts in

Bangladesh. Data of non-borrowers are collected from the same cohort to provide a control

group for comparison with borrowers. To estimate the impact of per capita monthly

expenditure and other household characteristics on budget share of items consumed by

borrowers and non-borrowers the study relies on An Almost Ideal Demand System (AIDS)

model. The estimated results of Iterative Seemingly Unrelated Regression (SURE) suggest

5

that borrowers of microcredit programs are better off in terms of consumption of most of the

food and non-food items compared to non-borrowers.

Yunus(2009) stated that Loans are given for income-generating work and initially it was

decided to influence the clients on their choice of work. The principle of the Grameen Bank

system is that the people should not have to go to the bank, rather the bank should go

to the people. I n comparing Grameen to conventional banks, Yunus states that the

difference for one, lies in the fact that their clients do not need to show how large are their

savings and how wealthy they may be, instead they need to prove how poor they

are .Further, the success of the bank is gauged not by bad debt figures or repayment rates,

although this is necessary for their internal records, but whether or not the lives of the clients

have improved and they have been extricated from the evils of poverty The author's

economic philosophy is another chapter of great interest. Although not consider ing himself

to be a follower of capitalism per se, he does believe in the global fr ee market economy and

the power of the free market. He does not think it right to offer unemployment benefits to

redress the problem of the poor. All the poor need, he holds, is financial capital. He also

advocates competition as a driving force for all innovations. Yunus proposes that we replace

the limited profit maximization principle of capitalism with a generalized principle - an

entrepreneur who maximizes both profit and social returns. In this way an entrepreneur

could run social services such as a health care service for the poor, if financially

viable. Such entrepreneurs would be steeped in social consciousness. A willing suspension

of disbelief is called for here, as even though one would wish to endorse his views on the

goodness of human nature, sadly his philosophy seems to border on the idealistic and

ephemeral rather than being a true depiction of man's inherent nature.

Yet, so successful has been this venture that it has been replicated with greater or lesser

success in other countries of Asia, Africa, Latin America and now even in the US. It has also

expanded its spheres of activities to ventures such as housing loans, fisheries and retirement

schemes.

To conclude, a word on Pakistan's experience with micro finance. Unfortunately this has not

been as salubrious as the experience of Bangladesh thus far, for whatever reason. Yet

the intended outreach this fiscal year is 3 million poor, up from last year's 2 million.

We all live with rampant poverty and our reaction is invariably one of apathy,

indifference or resignation that individually there is very little if at all we can do about

6

it. Yunus is that rare individual who not only believes that the evil of poverty can be

eradicated but has devoted his entire life's work to realizing this dream.

Hussain (2009) stated that over the past two decades, unrest in Jammu and Kashmir has

affected the valley people, especially the urban poor, either by displacing them from their

livelihoods or leaving them without any. He says that their poverty levels are aggravating and

seek an urgent but long-term solution. Although some organizations have started working for

the development of the area, there is ample scope for microfinance institutions to help the

urban poor.

He has also written that according to a BPL survey of Jammu and Kashmir by the Directorate

of Economics and Statistics (DES), over 2.21 lakh people fall under below urban poverty

level in the state of Jammu and Kashmir. And in the district Srinagar alone, there are over

73,262 BPL populations, according to DES mid-year estimates (2007-08). The fact was that

there are many organizations that are focusing on the rural parts of the state but somehow the

urban areas are missing from their developmental plans. While the skilled ones manage to get

employed anyhow, it was the large majority of the unskilled people who are forced to work in

the unorganized sector. Many of them live in urban areas with low and unsustainable income.

Chakrabarti (2007) in his research report says that Microfinance is gathering momentum to

become a major force in India and the self-help group (SHG) model with bank lending to

groups of (often) poor women without collateral has become an accepted part of rural

finance. His paper discusses the state of SHG-based microfinance in India. With traditionally

loss-making rural banks shifting their portfolio away from the rural poor in the post-reform

period, SHG-based microfinance, nurtured and aided by NGOs, have become an important

alternative to traditional lending in terms of reaching the poor without incurring a fortune in

operating and monitoring costs. The government and NABARD have recognized this and

have emphasized the SHG approach and working along with NGOs in its initiatives. He also

says that over half a million SHGs have been linked to banks over the years but a handful of

states, mostly in South India, account for over three-fourth of this figure with Andhra Pradesh

being an undisputed leader. In spite of the impressive figures, microfinance in India is still

presently too small to create a massive impact in poverty alleviation, but if pursued with skill

and opportunity development of the poor, it holds the promise to alter the socioeconomic face

of the India's poor.

7

Weber (2006) has written that measuring the performance of microfinance institutions

(MFIs) is not a trivial task. Indeed, looking at the financial sustainability of an MFI only

gives one feature of its performance. As many MFIs primarily exist in order to help the

poorest people, one also has to include aspects of outreach in their performance. Hence,

MFIs' performance can be termed multidimensional.

Kimos , Gopinath, Hossain (2009) evaluated the extent to which Sinapi Aba Trust has

contributed to poverty reduction among rural and urban poor especially women by supporting

them with small loans to expand their businesses to generate income to build up their asset

base. Using a cross-sectional data from 547 respondents, they studied that participation in the

programme has enabled established clients to own savings deposits and subscribe to a client

welfare scheme which serves as insurance to pay off debts in times of illness or death.

Established clients were also found to be in a better position to contribute towards the

education of their children and payment of healthcare for members of their households as

well as contribution towards the purchase of household durables. The study noted that

programmes that are financially sustainable have greater effects on participants, and that

there is the need for clients' graduation to benefit most from participation in such

programmes.

Aurangabadkar and Diwan(2010) stated in their research paper micro-finance plays an

important role in integrating rural development and poverty alleviation. The impact of micro

finance on rural development and poverty reduction has been measured in terms of several

dimensions such as improved income, employment and household expenditure and reduced

vulnerability to economic and social crisis. They said however, integrated rural development

and technology based programmes leading to incoming generating opportunities for rural

population can easily be put on fast track by the use of micro financing.  For implementing

these technologies we have to make efforts to examine location specific technologies and its

implementation.  People belonging to villages are still unaware of the banking policies and

credit systems. They are lacking the knowledge of the technologies available and how micro

finance is used. We must make villagers to familiarize about the technologies by conducting

training and awareness programmes and the aim of these programmes should be not only on

lending and repayment of microfinance but proper use of micro finance for technology

implementation. NGOs should also communicate to them and share their views with

8

villagers. Banks should convert and build up professional system into social banking system

for poor. While giving micro finance to the villagers the micro finance institutions should

also arrange the experts who are aware of how, when, where and which technology is being

used and how best they are useful for villagers so that it will build and sustain the rural

developmental activities. In these efforts, the Government of India and the State Government

should also provide the support for capacity building initiative and ensure transparency and

enhance credibility through disclosures.

Bergenfield (2009) stated that though nearly 30% of the Indian population lives in urban

areas, only 5% of all microcredit in India goes to the urban poor. However, the potential of

urban microfinance is huge; the urban population is expected to increase to 50% of the total

population by 2030. The Centre for Micro Finance conducted several cases studies on urban

MFIs. The case studies revealed that the urban market poses different demands and

challenges compared to the rural sector, which probably contributes to the sectors' slower

growth. One of the main challenges to urban microfinance is the more transient nature of the

urban poor population. Bad borrowers would be easily identified as in the formal banking

sector, and microfinance could grow more rapidly in urban areas where the group-lending

model seems to meet varied success. It would also be feasible for MFIs across the sector to

offer individual loans, allowing the best borrowers not to be held back by their groups, which

happens when receiving smaller loans and waiting longer periods of time for the loans than is

desirable.

United States Agency for International Development (2007) has given a report about

Microfinance Development Strategies in Iraq with the name of THE IRAQ MICROFINANCE

STRATEGY. There, the Agency has given a six step strategy for Microfinance Development

in Iraq. Here, it has also developed a feasibility report about the microfinance model in the

Urban and semi-urban areas in Iraq. However, there is a huge difference in the demographics

of Iraq and India, yet the Model of the Research is applicable in India as well. It has analysed

the difference between Urban and Rural needs of finance and find a gap for Semi-Urban

areas. It has pointed out the partial remoteness of Semi-Urban areas and partial Development

and advantages of the same. It has also given a mixture of the Urban and Rural Supply of

funding to fulfil the needs of Semi Urban areas. Same is possible in India as well. Here, semi

urban market may be seen as a mixture of Urban and Rural Areas.

9

Claude Peloquin (2008) discussed the benefits of Microfinance Model in Semi-Urban areas

of Bangladesh. He has given his analysis about the need and scope of Microfinance Model in

the country. He has introduced the Microfinance Model as a tool of Poverty removal and

citizen-development from semi-urban and rural areas of Bangladesh. He had given a focus on

the proper allocation of the financial recourses in semi-urban areas and rural areas. He has

developed the fact in Bangladesh that the Credibility of Microfinance system is always high,

if given for a small Business purpose. He has stated that in Microfinance, default rate is low

and funds, because are utilized properly, give handsome returns as well.

Ms. Thilakarathna D.J(2008) has developed an approach to the Microfinance system with

reference of involvement of Women in the Financial services at micro level. She has given an

important aspect of microfinance that the ladies in the semi-urban and urban areas may be the

largest needed person for micro financial services. She has taken Sri Lanka as his proposed

country. She states that women in semi-urban and urban areas have very lesser tasks to

perform at their homes and thus, they may start a small or individual production house for

domestic products. For this, they will require the funds and the microfinance system may help

those most. She has proposed the microfinance system as a feasible financial model in Sri

Lankan Economy. She also researched about the effectiveness of the mechanism of

Microfinance system and its impacts on the services.

Miguel Delfiner and Silvana Perón(2007) conveyed in their study that till long time,

microfinance system has been known as a system for poor people in developing economies.

They have justified the need or importance of the system in developed economies as well.

They proposed the model of Micro financing as a concept of Downscaling from Up-scaling.

They have developed certain assumptions, which are widely acceptable, as they have

assumed that there is extensive Demand of Micro financial Services and this may achieve the

industry interest returns on the up-scaled loans, and second, that the financial institutes are

strong enough to meet the demand of Funds in Microfinance system and they have an Interest

in the System. They have analysed the positivity as well as nativity of the microfinance

System and proved the model of Microfinance feasible for Developed economies as well.

10

Alberto Chaia, Robert Schiff, and Esteban Silva (2010) have tried a different service in

Microfinance in Urban and Semi Urban areas, They have planned to associate the basic needs

of the people with Microfinance system rather that giving micro credits for Industry purposes.

They have designed Correspondent Model for the same. They argued that a Correspondent

may move in the market, but a branch may not; He may develop relationship in the market ,

he may diversify his product offerings and he may conduct pilot testing offerings to market

development. However these arguments have certain flaws, Chaia, Schiff and Silva have

considered those as well. Reliability on a single correspondent, hidden facts, payment issues

and many more they have recognised but not solved. Overall, we can say that model

developed by these three is not fully accurate, but considerable in judging the credibility of

Microfinance in Semi Urban and Urban areas of Developed Economies.

Adil S. Zainulbhai (2007) had interviewed Mr. Montek Singh Ahluwalia, the current Deputy

Commissioner of Planning Commission of India. In this Interview, Mr. Ahluwalia had briefly

justified the microfinance model in Indian Economy. He had upraised the microfinance

companies working in India and invited more in this sector. He had accepted the importance

of Microfinance Model in Indian Economy and given an indication to lead the system not

only to rural areas but to expand its scope.

11

3. Need of the Study

India has nearly 400 million people living below or just above the poverty line.

Approximately, 75 million households need micro finance and of this, 15 million are urban

slum dwellers (Sriram 2002). If we go through the literatures we can see that the scholars are

having different mindset on this topic. Some people Says It is fusible and having huge

potential while some scholars says that microfinance model will not work in the semi urban

areas.

Microfinance claims to provide the poor an access to capital giving them opportunity to

climb the economic ladder. A close examination of few microfinance operations around the

world has indicated that very small fraction of poor who use the microfinance products are

able to uplift themselves from poverty, and even those who do manage to escape poverty take

5 to 10 years at an average. India is fast becoming one of the largest micro finance markets in

the world even then; the link between micro finance and poverty alleviation is not proven.

In India more than 15 million people are urban slum dwellers at present and still the

microfinance organizations are not giving so much emphasis on semi urban or urban areas.

There the question arises that the microfinance is feasible in the semi urban areas or not from

here the need for my study arises.

4. Objectives of the Study

To find out how feasible will the replication of micro finance model be in semi-urban

area and also try to gauge the openness of people towards microfinance.

To analyze the current factors for which the people require micro credit in semi urban

area.

To study the broad spectrum of microfinance products and services in the area.

12

5. Research Methodology

Research Type : Descriptive

Data Collection : Primary data-by direct interaction with potential

customers and the non banking institutions and money

lenders with the help of questionnaire.

Secondary data from the micro financial institutions

already working in semi urban areas

Sampling Technique : Convenience Sampling

Sample Size : 150

Tools to be used for Study : Questionnaire with semantic Differential Scale

Techniques to be used for analysis : Factor analysis and graphical representation

6. Tentative Chapter Scheme

1 Introduction

2 Review Of Literature

3 Objective and Research methodology

4 Data Analysis & Interpretation

5 Findings & Suggestions

6 Conclusion

7 References

8 Appendix(Questionnaire)

13

7. References

Rahman S, (2010) Consumption difference between Micro-credit borrowers and

Non-Borrowers: A Bangladesh Experience. The Journal of Developing areas, Vol.43, Iss

2; p.g. 313, 14 pgs

Shoji M, Does Contingent Repayment in Microfinance Help the Poor During

Natural Disast ers? The Journal of Development Studies. London: Feb 2010. Vol.

46, Iss. 2; pg. 191

Rahman S, Bhuyan R, Vaziri R, Microcredit Programs and Consumption Behaviour

of the Borrower: Evidence from Bangladesh. Journal of American Academy of

Business, Cambridge. Hollywood: Mar 2009. Vol. 14, Iss. 2; p. 83 (10 pages)

Yunus, Banker to the Poor: The Story of Grameen Bank. The Lahore Journal of

Economics. Lahore: Summer 2009. Vol. 14, Iss. 1; pg. 173, 3 pgs

Hussain B, (2009) Rising urban poverty in Jammu and Kashmir calls for focus on

microfinance available at http://www.microfinancefocus.com/news/2009/07/30/rising-

urban-poverty-in-jammu-and-kashmir-calls-for-focus-on-microfinance/

Chakrabarti R,(2007) The Indian Microfinance Experience - Accomplishments and

Challenges, available at www.isb.edu/CAF/File/The-Indian-MicroFinance-

Experience.pdf

Weber (2006) Analysis of the Effects of Microfinance on Poverty Reduction, available at

pdf.wri.org/ref/morduch_02_analysis_effects.pdf

Aurangabadkar N and Diwan A. D,(2010) Role of microfinance for promoting

integrated rural development and poverty alleviation available at

www.articlesbase.com/.../role-of-microfinance-for-promoting-integrated-rural-

development-and-poverty-alleviation-2936937.ht

14

Peloquin C. (2008) The role of micro-finance in environment and development in

Bangladesh: some opportunities and challenges, UPCD-CIDA, Center for Natural

Resources Studies (CNRS), Bangladesh

United States Agency for International Development (USAID) (2007) THE IRAQ

MICROFINANCE STRATEGY, The service Group International Economic

Consulting

Thilakarathna D.J.(2008) Impact of Microfinance Loans in SME Sector in Sri Lanka.

With Special Reference to the Women Involved Enterprises,

Sri Lanka Institute of Information Technology, Colombo, Sri Lanka

Miguel Delfiner and Silvana Perón (2007) Regulatory Planning and Research

Department, Regulations Area, Central Bank of Argentina (BCRA)

Stemper, G. A. (1996). Commercial banks and women micro entrepreneurs in Latin

America. Small Enterprise Development. 7, No. 3.

Helms, B. & Reille, X. (2004). “Interest rate ceilings and microfinance: The story so

far.” CGAP Occasional Paper No. 9.

Chaia A. , Schiff R. , and Silva E (2010) , A new idea in banking for the poor, McKinsey

Quarterly, McKinsey and Company, November 2010, Vol.1

World Bank, Payment Systems Development Group, Remittance prices worldwide,

www.remittanceprices.worldbank.org, Version 1, October 23, 2010.

Adil S. Zainulbhai, (2007), Building a better India, Special Edition, McKinsey

Quarterly, McKinsey and Company

15

16