Micro Finance: A Financial Service for Poor

By Kaur, Rajinder; Kaur, Varinder | Political Economy Journal of India, July-December 2010 | Go to article overview

Micro Finance: A Financial Service for Poor


Kaur, Rajinder, Kaur, Varinder, Political Economy Journal of India


Most of the poor in developing countries lack access to the formal intermediaries. This limits their ability to acquire assets, start business, finance emergency needs and insure themselves against illness and disaster (Yunus). According to Asian Development Bank, alone in Asia and pacific region, over 900 million people in about 180 million households live in poverty. More than 670 million of these poor people live in rural areas, most of them rely on secondary occupation as agriculture alone is not enough to provide for their growing needs.

To solve the problem of poverty all over the world, especially in less developed counties of the world; there are countless NGOs and international agencies operating with the aim to help the poor, better their standard of living by providing them incentives in form of small credits.

In context of India, poverty alleviation has remained one of the main objectives since first five-year plan. To achieve this objective, India has made systematic efforts including targeted programs, land and tenancy reforms, participatory and empowerment based approaches, provision of basic services etc. Despite of initiating various programs from time to time, qualitative results of these programs are far from satisfactory. In continuation of poverty alleviation programs micro finance was assumed as an important institutional devices for providing small credit to rural poor. Therefore micro-finance has received a lot of attention both from policy makers as well as in academic circles.

The origin of micro credit can be traced to the 1976 when Mohammed Yunus set up the Grameen bank experiment on the outskirts of the Chittagong University Campus, as an experiment. Grameen bank in Bangladesh started with collateral free credit to poor organized into small borrowers groups. This model of groups lending has been copied by various developing countries.

Micro Finance: Micro finance is defined as provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi urban and urban areas enabling them to raise their income levels and improve living standards.

The characteristic features of micro credit operation than are small loans to poor households in rural and urban areas for income generation through self-employment (NABARD). Micro credit programs are those programs, which extend small loans to poor people for self-employment projects that generate income, allowing them to care for themselves and their families (Swaminathan). Micro credit projects offer a combination of services and resources to their clients in addition to credit for self-employment.

In India the focus of Micro Finance was on a group approach and organizing the poor in to self help groups (SHGs). SHGs are considered as the best way to provide the credit to the poor who require it the most where by advantage percolates exactly to the needy.

SHG is a group of individual members who by an association, come together for a common collective purpose. SHGs comprise individual members known to each other, coming from the same village, community and even neighborhood. These are formed around the theme of saving and credit. A small group of individuals become members and pool their savings on a regular basis to form a collective fund. This fund is than rotated as credit amongst the members though self generated norms. Hence the basis of SHG is the mutuality and trust in depositing individual savings on group funds (Satish) External Funds can also be introduced to help SHGs after the functioning of an SHG becomes stable may be with the help of NGOs.

Beginning of Micro Finance in India

With a view to developing a supplementary credit delivery mechanism to reach the poor in cost effective manner, the National Bank for Agriculture and Rural Development (NABARD) introduced a pilot project in 1992 for linking 500 SHGs. This pilot project was basically a result of research projects initiated by NABARD. …

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