Faith-based Microfinance. An Alternative Tool of Poverty Alleviation

Contents

Acknowledgements

Figures

Tables

Chapter 1: Introduction
1.1 Background To The Study
1.2 Research Problem, Purpose And Questions
1.3 Purpose Of Research
1.4 Research Questions
1.5 Research Methodology
1.6 Scope Of The Study And Its Relevance To The Management Discipline
1.7 Organizational Of The Thesis
1.8 Definitions And Key Concepts

Chapter 2: Microfinance and Poverty Alleviation
2.1 Overview Of Microfinance
2.1.1 Key Principles Of Microfinance
2.1.2 State Of The Microfinance Sector
2.1.3 Role Of Microfinance In Financial Inclusion And Poverty Alleviation
2.2 Models Of Microfinance Intervention
2.2.1 The Grameen Model
2.2.2 Individual Banking Program
2.2.3 Credit Unions
2.2.4 Village Banking
2.2.5 Self Help Groups/Associations
2.3 Impact Assessment Of Microfinance Institutions
2.3.1 Types Of Impact Studies
2.3.2 Factors Of Impact Assessment
2.4 Need For Alternative Model
2.4.1 Challenges Confronting Microfinance
2.4.2 Desired Changes In The New Model
2.5 Conclusion

Chapter 3: Faith-based Microfinance
3.1 General Introduction And Background Of Faith-Based Organizations
3.1.1 Influence Of Faith In Fbos
3.1.2 Organizational Characteristics
3.1.3 Program Characteristics
3.1.4 Types Of Fbos
3.2 Significance Of FBO’s In Development
3.3 Religious Faiths And Microfinance Principles
3.3.1 Hindu Faith And Microfinance
3.3.2 Christian Faith And Microfinance
3.3.3 Islamic Faith And Microfinance
3.4 Empirical Studies On Faith-Based Microfinance
3.5 List Of Faith-Based Microfinance Institutions
3.6 Conclusions

Chapter 4: Research Design and Methodology
4.1 Scientific Ideals
4.2 Theoretical Framework For Impact Assessment Of Microfinance
4.3 AIMS-SEEP Framework
4.3.1 Design Strategies
4.3.2 Scope For Innovation
4.4 Phase 1: Case Study
4.4.1 Main Steps
4.5 Phase 2: Quantitative Study - Impact Assessment
4.5.1 Research Design
4.5.2 Research Type
4.5.3 Research Approach
4.5.4 Limitations Of The Research
4.5.5 Indicators And Variables Used In The Study
4.5.6 Research Hypotheses
4.5.7 Study Population..
4.5.8 Sampling Plan
4.5.9 Data Collection
4.5.10 Content Of The Structured Questionnaire
4.5.11 Pre-Testing Of The Questionnaire
4.5.12 Data Analysis

Chapter 5: Cases of Faith-based Model of Microfinance
5.1 Gramin Vikas Vigyan Samiti Jodhpur (GRAVIS) – A Case Of Hindu Faith-Based Microfinance
5.1.1 Organizational al Characteristics
5.1.2 Program Characteristics
5.1.3 Microfinance Program
5.2 Al-Khair Cooperative Credit Society Limited – A Case Of Islamic Faith-Based Microfinance
5.2.1 Organizational Characteristics
5.2.2 Program Characteristics
5.3 The Patna Parish Thrift Savings And Credit Cooperative Society Limited – A Case Of Christian Faith-Based Microfinance
5.3.1 Organizational al Characteristics
5.3.2 Program Characteristics
5.4 Comparative Analysis Of The Selected Cases
5.4.1 General Comparison
5.4.2 Comparison Of The Performance Of Banking Activities
5.4.3 Influence Of Faith On Selected FB-MFIs
5.5 Conclusion

Chapter 6: Performance Evaluation Of Faith-Based Microfinance
6.1 Descriptive Statistics
6.1.1 Details Of Sample From Mainstream MFIs
6.2 Demographic Profile Of Respondents
6.2.1 Age Group
6.2.2 Gender
6.2.3 Gender And Age-Wise Distribution
6.2.4 Religion
6.2.5 Education
6.3 Socio-economic Profile
6.3.1 Head Of Household
6.3.2 Income
6.3.3 Occupation
6.3.4 Dwelling Condition
6.3.5 Number Of Dependents
6.4 Experience of microfinance program
6.4.1 Years Of Association With The MFI
6.4.2 Incidence Of Borrowing
6.4.3 Average Loan Amount
6.4.4 Loan Repayment Period
6.4.5 Repayment Frequency
6.4.6 Collateral Requirement
6.4.7 Use Of Loan For Business
6.4.8 Savings With MFI
6.4.9 Use Of Other Financial Services
6.5 Socio-economic Impact Of Microfinance
6.5.1 Improvement In Self-Confidence After Joining The Program
6.5.2 Improvement Of Social Position Among Relatives And Family Members
6.5.3 Treatment Of Women
6.5.4 Awareness Of Women's Right
6.5.5 Improvement In Household Income
6.5.6 Improvement In Business Income
6.5.7 Increase In Household Savings
6.5.8 Capacity To Meet Emergency Needs
6.6 Client Satisfaction
6.6.1 Reasonability Of Interest Rates On Loans
6.6.2 Procedure Of Obtaining Loan
6.6.3 Repayment Policy
6.6.4 Timely Availability Of Loan
6.6.5 Discrimination In The Disbursement Of Loan
6.6.6 Technical Assistance In Business
6.6.7 The Office/Point Of Transaction Is Conveniently Located
6.6.8 Staff Support
6.7 Test Of Hypotheses
6.7.1 Poverty Variables
6.7.2 Client Satisfaction Variables
6.7.3 Summary Of Results

Chapter 7: Summary of Findings And Recommendations
7.1 Findings
7.1.1 Common Principles Of Faith-Based And Mainstream Microfinance
7.1.2 Value Addition By Faith-Based Microfinance
7.1.3 Performance Of Faith-Based Microfinance
7.2 Recommendations
7.3 Contributions To Knowledge
7.4 Suggestions For Future Research
7.5 Challenges
7.6 Conclusion

Appendix I Questionnaire for Clients.

Appendix II Questionnaire for Microfinance Institutions

Bibliography.

ACKNOWLEDGEMENTS

The first and foremost to be thanked for the completion of this book is Allah the Almighty, Who guided me to realize the beauty of faith. This book is based on my doctoral thesis completed at Birla Institute of Technology, India. I thank my alma mater and all the related members of the institution who helped me in successfully completing the thesis.

My doctoral study has taken me on a journey of many memorable events and challenges. I extend my thanks to all those who have supported me in any way through this process. I would especially like to thank Prof. (Dr.) S. L. Gupta, my main guide, who so generously motivated me to pursue my interest in microfinance at a time when there was a dearth of published research on the topic. He has helped me immensely, not just with his knowledge and research acumen but also with his continual encouragement. I am also indebted to my co-mentor, Dr. Viqar Ali Baig, who was ever ready to provide the necessary guidance whenever I sought his help. His suggestions, especially in structuring the thesis, are greatly appreciated.

I must also thank Prof Malcolm Harper who provided me with very useful suggestions on converting the thesis into book. He was so kind to share his personal experiences of how a doctoral research and a general book belong to two different genre, making it cumbersome for the researcher. Prof Arvind Ashta has been a constant influence in my research endeavors. He is a guiding star for many researchers working in the area of microfinance. I had the opportunity to receive valuable suggestions from Prof Roy Mersland, Prof Ahsan Jamil, and many others. I thank them all.

I acknowledge and thank all the three microfinance institutions, GRAVIS, Al-Khair Co-operative Society and The Patna Parish Cooperative, who participated in the study. Their dedication in working for the welfare of the underprivileged in society is admirable. I would especially like to thank the Heads of the three institutions, who showed so much interest in this study and cooperated to the best of their ability. The toughest part of the study was to conduct a field study in the Thar region of Rajasthan and this would not have been possible without the support of Smt. Shashi Tyagi, Secretary of GRAVIS. I am also grateful for the support of Mr. Arshad Ajmal, founding Chairman of Al Khair, and Fr. Francis Joseph, Secretary of the Patna Parish Co-operative, who were always there to help me with any information I needed. I am indebted to the daily collectors who helped with the client data-base of mainstream microfinance institutions. And, finally, I am deeply grateful to all the respondents in Patna and Jodhpur who participated in the survey.

Najmul Hoda

Figures

Figure 1 Framework of Impact Assessment

Figure 2: SHG Membership

Figure 3: Credit Delivery (All numbers in millions)

Figure 4: Gender-wise outreach

Figure 5: Income-wise outreach

Figure 6: Occupation-wise outreach

Figure 7: Faith-wise outreach

Figure 8: Receipts and Expenditure

Figure 9: Trend of Donations

Figure 10: Membership of ACCSL

Figure 11: Gender-wise outreach

Figure 12: Income-wise outreach

Figure 13: Occupation-wise outreach

Figure 14: Religion-wise outreach

Figure 15: Donation Income at ACCSL

Figure 16: Loans Outstanding at PTCCSL

Figure 17 - Deposits of PTCCSL

Figure 18: Gender-wise outreach

Figure 19: Income-wise outreach

Figure 20: Occupation-wise outreach

Figure 21: Religion-wise outreach

Figure 22: Distribution of respondent’s years of association with MFI

Figure 23: Incidence of borrowing

Figure 24: Average loan amount for the different MFI’s

Figure 25: Loan repayment period

Figure 26: Loan repayment frequency distribution in the two types of MFI’s

Figure 27: Collateral requirement in MFIs

Figure 28: Loan usage in the two MFI’s

Figure 29: Savings Pattern

Figure 30: Experience of other financial services

Figure 31: Improvement in self-confidence for the two MFI’s

Figure 32: Improvement in social position of respondent

Figure 33: Improvement in treatment of women

Figure 34: Increase in awareness of women’s rights

Figure 35: Improvement in household income

Figure 36: Improvement in business income

Figure 37: Increase in household savings

Figure 38: Capacity to meet emergency needs

Figure 39: Reasonability of interest rates on loans

Figure 40: Procedure for obtaining loans

Figure 41: Loan repayment policy

Figure 42: Timely availability of loans

Figure 43: Discrimination in the disbursement of loans

Figure 44: Technical assistance in business

Figure 45: Office location conveniently located

Figure 46: Satisfaction with staff support

Tables

Table 1: NABARD SBL program

Table 2: Existing and Desired Situation in the Microfinance sector

Table 3: List of Faith-based Microfinance Institutions

Table 4 List of social and economic variables impacting microfinance programs

Table 5: List of variables used to assess client satisfaction

Table 6: Summary of Hypotheses

Table 7: GRAVIS’ Objectives

Table 8: Dwelling condition of beneficiaries

Table 9: Savings Product of ACCSL

Table 10: Dwelling condition of beneficiaries

Table 11: Profit and Loss

Table 12: Loan types

Table 13: Dwelling condition of beneficiaries of PTCCSL

Table 14: Loans and Membership of PTCCSL

Table 15: Interest Margin at PTCCSL

Table 16: Comparative Analysis of FB-MFIs on selected parameters

Table 17: Provision of Financial Services by the selected FB-MFIs

Table 18: Comparative Analysis of Influence of faith on selected FB-MFIs

Table 19: Descriptive STATISTICS

Table 20: Details of sample from mainstream MFIs

Table 21: Age group of respondents

Table 22: Gender of respondents

Table 23: Gender and age-wise distribution

Table 24: Religion-wise distribution

Table 25: Education-level of beneficiaries

Table 26: Head of household

Table 27: Income distribution of respondents

Table 28: Occupation of respondents

Table 29: Types of self-employment of self-employed respondents

Table 30: Dwelling condition

Table 31: Experience of Respondents with MFI

Table 32: Reliability Analysis

Table 33: Univariate analysis on differences between Mainstream and Faith-based MFIs

Table 34: Summary of Regression Analysis

Chapter 1 Introduction

1.1 Background to the Study

Of all the sectors of society, the poor are the ones most in need of financial assistance. And yet they seem to have been largely neglected by the formal institutions. Nonetheless, microfinance has been proven to reduce such financial exclusion to some extent by enabling the poor to build assets, manage consumption and mitigate risks. By delivering such essential financial services as savings, loans and remittance, microfinance has devised innovative financial instruments to meet the financial needs of these people previously excluded from mainstream financial services. The most traditional product of microfinance is micro-credit or micro-lending, which gives small poor businessmen access to capital, allowing them the opportunity to grow their enterprises and become profitable. Higher incomes and reduced vulnerability result in improved living conditions and impact the social fabric in many ways.

In a significant development of this innovative tool of microfinance, the United Nations declared the year 2005 as the International Year of Microcredit. In doing so, it recognized the contribution that microfinance can make towards achieving the United Nation’s Millennium Development Goals (MDG) adopted by the majority of world leaders in September 2000. The prominent role of microfinance in the alleviation of poverty is also acknowledged on many other platforms such as the G8 Declarations of 2005 and 2004, the Commission on Private Sector Development, the Microcredit Summit, the Declaration of the International Year for the Eradication of Poverty and the International Decade for Eradication of Poverty.

The role of microfinance in the alleviation of poverty is thus globally acknowledged. Its role extends beyond finance to disseminating useful information on health and sanitation rights, educational rights, legal rights and other social issues. It is also particularly effective in targeting women, who have been the most marginalized section of society in many developing countries.

The microfinance concept is nothing new. It has, in fact, been practiced in some form from early civilization. There are reports of small, informal savings and credit groups in the 18th century (Srnec and Svobodová 2009). A major milestone in the development of microfinance was the establishment of the Grameen Bank in 1976. This experiment, initiated by Muhammad Yunus in a small village in Bangladesh, proved to be effective in changing the socio-economic conditions of the target group, in this case, poor women. The success of this experiment was recognized by the international community with the conferment of the Nobel Peace Prize in 2006 on Dr Muhammad Yunus. In its original as well as variant forms for different cultures, the Grameen Model has now been adopted in many countries. Over the years microfinance has evolved into a mature financial product with an astonishingly high penetration and coverage of low income people in many developing countries.

Although the UN Millennium Development Goals’ (2000) declaration reiterated the cruciality of poverty alleviation among the world’s policy makers, no far-reaching solution was specified, though it is widely recognized that microfinance is one of the keys to stimulating growth. Sachs (2005) mentioned that “previous solutions to end poverty in the developing world have been the purview of large inter-governmental institutions such as the World Bank, where development economists working with donor and recipient governments formulated strategies to stimulate economic growth.” Aghion and Armendariz de Aghion (2004) agree that in the case of developing nations, microfinance appears to be the logical choice because a bottom-up approach by providing access to capital may have a stronger impact on poverty.

The lack of access to financial services, especially loans, has been found to be one of the main reasons that many societies remain poor. Under conventional forms of financing, the poor do not have access to loans or other financial services because of their inability to put up acceptable collateral as well as the financial institutions’ unwillingness to accept small amounts. According to Sananikone (2002), developmental economists find that access to financial services is the key to enabling the poor to achieve sustainable development compared with most other measures. Such sustainable development would include the increase and diversification of income sources, enhancement of human and social capital, and overall improvement of living standards.

It is this ability to open up capital inflows to the poor that has made microfinance quite a distinct method of addressing development. Several researchers (Karnani 2007; Greer 2008; Sengupta and Aubuchon 2008) have supported the role of microfinance in poverty alleviation as well as improving living conditions. Many countries, too, have started to seriously consider its wider contribution beyond poverty alleviation to the development of small and micro-enterprises.

In addressing these twin goals of financial inclusion and poverty alleviation, microfinance provides the critical motivations for the self-development of the entrepreneur and assurance of sustainability for the financial institution. There are many reported cases of the positive impact of microfinance on the lives of the poor across the world. Swain (2006) mentioned that the provision of financial services to the poor has resulted in “increasing household income and economic security, building assets and reducing vulnerability, creating demand for other goods and services (especially nutrition, education, and health care) and stimulating local economies.”

The government of India on its part has embarked on various initiatives to address poverty. The most notable of these are the nationalization of banks in the late 1960s, the Integrated Rural Development Program (IRDP) during 1978-90, and the NABARD Self Help Group Bank Linkage Program (SBLP). In fact, the microfinance sector in India is rightly called a museum of several approaches found across the world. Different models of microfinance have emerged based on various dimensions such as target group, target area, rate of interest, nature of savings, collateral requirements and so on.

In India, the microfinance institutions exist in a number of legally-constituted structures, namely, thrift and credit cooperatives, banks, non-banking financial institutions and government agencies. The reported size of microfinance borrowers is 26.7 million (M-CRIL 2010), bringing the size of the microfinance sector on par with the Indian financial system in terms of the number of beneficiaries involved.

1.2 Research Problem, Purpose and Questions

Development of Research Problem: Although the role of microfinance in poverty alleviation has been adequately backed by empirical findings, its benefits have been questioned by some researchers like Murdoch (2000). They argue that the effect of microfinance does not reach the poorest individuals in society. Secondly, a typical microfinance model assumes that the poor are entrepreneurial by nature, which may not be entirely true. Additionally, the tendency towards commercialization and acceptance of microfinance as a business model have posed new challenges to the real objectives of microfinance in its poverty alleviation efforts. There have been incidences of over-lending, multiple borrowings and diversion of loans for unproductive purposes (Rahman 1999; Buckley 1996). In fact, a crisis erupted in 2010 in Andhra Pradesh, which pointed to the mishandling of marketing factors, indicating lack of credit discipline, multiple lending, lack of proper incentives for sound underwriting or customer care, and lack of internal controls.

A critical challenge for microfinance is to understand the ways in which social capital may be secured for the credit function. In lieu of physical collateral, the microfinance institution ought to understand the difference in social capital formation in various contexts. Donor-based models, which rely heavily on external funding sources, have continued to exist in the microfinance sector and have proven to be more effective than their profit-making or self-sustaining counterparts. Whatever the reason, the poorer sector need the support of the larger community to stay afloat and break out of the poverty trap.

In order for microfinance to sustain its efforts without being labeled the notorious money lender, lowering transaction cost is critical. Savings mobilization has proven to be a cheap source of funds that reduces transaction cost. On the other hand, poor clients need to develop a more trusting relationship with the financial institution, and more internal controls and accountability need to be put in place. Again, the group-lending methodology may not be as successful in every situation, and several studies point to the fact that the group method is less sustainable in some cases.

Another pertinent issue is the need for financial instruments and methods that adapt to the cultural settings of the beneficiaries. The overall microfinance penetration in terms of volume is still very low compared to the huge population excluded from the banking system. In order to attain the twin goals of financial inclusion and poverty alleviation, existing efforts need to be enhanced by innovative and diverse approaches, particularly with product differentiation, operational efficiency and outreach improvement. Since the majority of microfinance models work on similar or variant methods of group lending, they tend to suffer from the same systemic problems widely reported. The existing models are largely based on the group-lending method. Therefore, addressing the above issues calls for greater sensitivity to needs, improvements in the overall strategy and more innovative methods of handling poverty alleviation.

In India the role of faith in development has started gaining prominence among policy makers and researchers. A faith-based microfinance and poverty alleviation initiative is generally started by “a religious institution, or by an individual for strong religious motives; works with and through local ‘branches’ of the religion – churches, mosques, temples and raises a substantial proportion of its funds from people of the same faith” (Harper et al. 2008). Several researchers have noted the significant rise of Faith-Based Organizations (FBOs) in socio-economic development. Such Faith-Based Organizations are engaged in the development of humanitarian activities that explicitly claim a religious motive (Kirmani and Zaidi 2010). Harper et al. (2008) provide some examples of faith-based microfinance institutions such as Shri. Kshetra Dharmasthala Rural Development Program in Mangalore, Akhuwat Microfinance in Lahore, Catholic Bank in Ranchi and Holy Cross in Hazaribagh.

One interesting finding of the above-mentioned studies is that these institutions break many of the conventional rules of the lending process such as compulsory savings, gender discrimination, group method and dependence on subsidies. What is even more interesting is that these faith-based organizations manage to sustain their operations through the profits generated by the enterprise. It is also worth pointing out that, in terms of operations, these faith-based organizations refute several myths. One myth is that they serve only people of the same faith – which is patently false. Secondly, contrary to popular opinion, the staffers are not solely made up of people of the same faith. Lastly, the sources of funds are also diverse and not from a particular faith.

For compelling reasons, therefore, faith-based organizations are considered a viable alternative to the existing development policies. Furthermore, these institutions are some of the oldest in existence and sometimes the only infrastructure available for the delivery of resources. Not only are they perceived as credible, they have been consistently successful in empathizing with the masses and thereby adding the unique elements of ‘religious social capital’ and ‘spiritual element’ to microfinance programs.

Although faith-based organizations have played a major role in providing humanitarian services through religious institutions for a long time, major policy makers have been reluctant to explore the capacity-building dimension of faith for various reasons. To address such prejudices, The World Faith Development Dialogue initiated by the World Bank was a significant step in bringing together leaders of various faiths to explain their approach to human development. It is rapidly being realized that the existing secular approaches are not the only way to deliver the hoped-for change. For this reason there has been an increased interest in the role of faith-based institutions among researchers, practitioners as well as donors.

This interest is quite evident from the literature and idea exchanges taking place at various platforms. However, there is a noticeable lack of empirical study on the role of faith-based microfinance institutions in poverty alleviation (Martin et al. 2007; Mersland et al. 2001; van Engelenhoven 2006). There are still fewer studies on faith-based microfinance in India. Harper (2008) is a seminal introduction to the concept of faith-based microfinance, while Ashta (2011) has proffered several research questions to be investigated by researchers.

Again, the presence of FBOs in the area of microfinance elicits a number of questions regarding their distinctive characteristics (Marshall 2005; Bakewell and Warren 2005). Some of these characteristics relate to the effect of government funding in the areas of their mission, distinctiveness, staffing, programming and supporters (Robinson 2011; UNFPA 2008) and more questions regarding their operations, sustainability, social performance, selection of target beneficiaries, practical incorporation of the ideal faith principles (Martin et al. 2007; Kessler and Arkush 2009; Ashta, ibid); and, finally, those concerning the comparative advantage of FBOs in the delivery of development programs (Morse and Mc Namara 2009).

1.3 Purpose of Research

As indicated in the research problem, faith-based microfinance appears to operate along principles distinct from mainstream microfinance. The purpose of this study is therefore to focus on the functioning of such faith-based microfinance and to explore its role as an alternative tool of poverty alleviation. In order to have a meaningful insight into the impact of faith-based microfinance in the lives of its beneficiaries, it is necessary that a comparison be made with mainstream microfinance on commonly accepted parameters of poverty alleviation.

In order to realize the stated objective of the research, the pertinent literature dealing with Faith-Based Organizations (FBOs) and faith-based microfinance has been reviewed. Such a review also will help in our understanding of the theoretical framework of impact assessment for microfinance institutions. Since the listing of microfinance institutions on the basis of faith is not available to the general public, the literature review was particularly helpful in generating a list of faith- based microfinance institutions present in India and the rest of the world.

To recapitulate, the focus of the research is to understand the role of faith-based microfinance in poverty alleviation in India. In order to achieve the main objective of this study, four sub objectives have identified:

i) The first objective is to understand and evaluate the shortcomings and issues persisting in the mainstream model of microfinance in order to highlight the need for an alternative model.
ii) The second objective is to understand the concept of faith-based microfinance, and create a theoretical framework for the study.
iii) The third objective is to understand the functioning and standard operating procedures of faith-based microfinance institutions, more specifically, to study the influence of faith on various aspects of the institutions.
iv) The fourth objective is to evaluate the performance of targeted faith-based microfinance institutions specifically in poverty alleviation. In order to achieve this objective, the performance of faith-based microfinanceinstitutions was assessed relative to the performance of the mainstream microfinance institutions.
v) The fifth objective is to suggest practical and conceptual solutions related to the suitability of faith-based microfinance as an alternative model in achieving the United Nations 2000 Millennium Development Goals by addressing the shortcomings of existing models.

1.4 Research Questions

The above stated objectives of the study shall be met using a framework which consists of the main research question and other sub questions. The main research question in this study is formulated as: “ Five sub-questions are derived, one for each step of research, from this main research question.”

The First research question is theoretical and is related to an overview of the microfinance sector. This can be stated as: “Describe the mainstream models of microfinance, the state of the microfinance sector and the critical issues that highlight the need for an alternative model.” Chapter Two deals with this research question.

The Second research question is also theoretical and is related to the understanding of faith-based organizations and their role in the development of faith-based microfinance. This research question is discussed in Chapter Three as: “What are the distinguishing features of faith-based organizations and their role in microfinance?”

The Third research question is: “How do faith-based microfinance institutions operate and what is the influence of faith on the functioning of such institutions?” Studying three cases of faith-based microfinance institutions, this research question is discussed in Chapter Five.

The Fourth research question is: “What is the performance of faith-based microfinance institutions in poverty alleviation?” This research question is answered in Chapter Six and uses the statistical methods discussed in Chapter Four.

Finally, the Fifth research question based on a comparison of theoretical and practical findings states: “Discuss in detail – the conclusions and future research implications?” Chapter Seven is allocated the answer to this research question.

1.5 Research Methodology

Since almost all the present studies rely on data from both primary and secondary sources, the design of this study can be termed as both Exploratory and Descriptive. Since empirical studies on faith-based microfinance are negligible, an exploratory study was necessary. In addition, a descriptive study was undertaken to compare the impact of faith-based microfinance with mainstream microfinance. The entire study can thus be divided into two phases:

Phase 1 – Case Study

Phase 2 – Impact Assessment

Phase 1 comprised an in-depth study of various microfinance institutions affiliated with three major faiths in India. The case analysis was done in accordance with standard protocol (Yin 1994). The primary data used in the impact assessment was collected directly from the respondents by way of an interview that contained a structured questionnaire, which was administered by the researcher with the support of loan officers and private daily collectors. Data analysis involved the use of descriptive statistics such as frequency distributions, means, percentages and cross tabulations. An independent sample t-test was employed to test the different hypotheses. The outputs of the analyses were presented in tables and figures. The statistical tool used was the Statistical Package for the Social Sciences (SPSS) Version 16.0. This research methodology is further discussed in Chapter Three.

1.6 Scope of the Study and its relevance to the Management Discipline

The UN Millennium Development Goals 2000 statement provides a checklist of the possible areas for poverty intervention, and microfinance is applied as a potential tool to this end. The microfinance methodology has developed into an industry that promises good returns for investors. Though the pivot of this industry is poverty reduction, the supply-demand dimension cannot be overlooked. A recent estimate by Rhyne (2010) shows the enormous size of the market defined as ‘unserved’ or ‘excluded,’ which is over 2 billion, while existing microfinance institutions “serve less than 5 percent of the potential market” (MIX report 2010).

This exposes the gigantic task of poverty alleviation and achieving the MDGs. Apart from such glaring unmet needs, it is also being realized that the standardized model of microfinance may not be the best model in all cases. Therefore, in order to achieve the goal of outreach, innovation in terms of model and product is called for. And the faith-based model may provide the required tools for innovation both in terms of model and product.

Khavul (2010) believes that “the emergence of microfinance presents a golden opportunity for management scholars to make a difference in understanding the complex and as yet unsettled phenomenon of poverty alleviation.” The study of doing business with the poor class could be a significant subject for management research. It refers to approximately four billion people who constitute the global population living below the poverty line and explores the benefits that this market can bring to the international economic community. Microfinance institutions are simply the financial service provider to the customers at ‘the base of the income pyramid’ as coined by Prahalad (2005). In essence, the model ‘BOP-Bottom of the Pyramid’ speaks of a low income market segment with a huge potential, both in terms of demand and offer of services.

In light of the above, the overall scope of the study is to measure the impact of faith-based microfinance on the socio-economic condition of the beneficiaries. The results of this study would therefore pave the way for more intensive research into the role of faith-based microfinance as an alternative model in poverty alleviation, and for greater engagement of faith-based organizations with policy makers.

1.7 Organization of the Thesis

The research thesis contains seven chapters addressing the five research questions stated earlier with three theoretical research questions and two practical research questions. The last chapter concludes the study and points to future research directions. The structure of the thesis is as follows:

Chapter One: Introduction

The first chapter introduces the context and background of the study. It also presents a framework within which the discussion is done. This chapter includes the research objectives, research questions, study limitations, and key concepts and definitions.

Chapter Two: Microfinance and Poverty Alleviation

This chapter is based on a review of the literature. The main focus is to understand the mainstream models of microfinance, the existing issues and the need for an alternative model.

Chapter Three: Faith-Based Microfinance

This chapter discusses the literature pertaining to the theoretical background of faith-based organizations. The chapter highlights the distinguishing marks of faith-based organizations as well as existing faith-based microfinance institutions.

Chapter Four: Research Methodology

This chapter presents the theoretical framework and methodology adopted for the study. The main sections of the chapter cover methods of estimation, data collection and instrument, data description, study population and sample size.

Chapter Five: Case Studies related to Faith-based Microfinance Institutions

This chapter reviews case studies of the institutions affiliated to the three faiths selected. The selected cases are analyzed along various dimensions such as operating procedures, faith pervasiveness, outreach, mission and vision as well as microfinance programs and policies.

Chapter Six: Performance Evaluation of Faith-Based Microfinance

In this chapter the empirical findings of the microfinance programs of both secular and faith-based models are presented and compared using the Likert scale of comparing the perceptions of the beneficiaries of the two models.

Chapter Seven: Summary and Conclusions

In the Seventh and the last chapter the conclusions derived from the findings of the empirical study are discussed. The chapter ends with the scope and recommendations for further studies on the topic.

1.8 Definitions and Key Concepts

Microfinance

“The provision of financial services such as credits (loans), savings, micro-leasing, micro-insurance, and payment transfers to economically active poor and low income household to enable them engage in income generating activities or expand/grow the small businesses” (Irobi 2008).

Micro-credit

“Micro-credit is a small amount of money loaned to a client by a bank or other institution. Micro credit can be offered, often without collateral, to an individual or through group lending”

(http://www.yearofmicrocredit.org/pages/whyayear/whyayear_aboutmicrofinance.asp).

Financial Inclusion

Financial inclusion can be defined as:

“A state in which all people who can use them have access to a full suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients. Financial services are delivered by a range of providers, most of them private, and reach everyone who can use them, including disabled, poor, rural, and other excluded populations” ( http://www.centerforfinancialinclusion.org/publications-a-resources/financial-inclusion-glossary ).

Micro finance Institutions (MFIs)

Microfinance institutions are defined as the “Institutions that provide financial services to low-income populations”

(http://www.centerforfinancialinclusion.org/publications-a-resources/financial-inclusion-glossary).

Empowerment

Empowerment refers to “increasing the spiritual, political, social and economic strength of individuals and communities” (Khan and Rahaman 2007).

Faith

Faith is defined as “ideas that motivate individual and collective human action; affect development processes and outcomes in a variety of ways” (DFID 2005).

Faith-based Microfinance

Any organization that derives inspiration and guidance for its activities from the teachings and principles of faith or from a particular interpretation or school of thought within that faith is an FBO.

Poverty

Poverty is, “a denial of choices and opportunities, a violation of human dignity. It means lack of basic capacity to participate effectively in society. It means not having enough to feed and clothe a family, not having a school or clinic to go to, not having the land on which to grow one’s food or a job to earn one’s living, not having access to credit. It means insecurity, powerlessness and exclusion of individuals, households and communities. It means susceptibility to violence, and it often implies living on marginal or fragile environments, without access to clean water or sanitation” (Gordon 2005).

Client Satisfaction

It means “a judgment that a product of service feature, or the product or service itself, provides (or is providing) a pleasurable level of consumption related fulfillment; including the levels of under or over fulfillment” (Oliver 1997, p.17).

References – Chapter 1

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Ashta, A., and De Selva, R., 2011. “Religious Practice and Microcredit: Literature Review and Research Directions.” Postmodern Openings 2(8): 33-44.

Bakewell, O., and Warren H., 2005. “Sharing Faith with Donors .” Informed Vol. 12, INTRAC. http://www.intrac.org/docs/Sharing%20faith%20with%20donors.doc/

Bali, S. R., 2006. “Can microfinance do it? Women’s empowerment and the Self-Help Group.” Draft, Bank Linkage Program in India, Department of Economics, Uppsala University, Sweden.

Buckley, G., 1997. “Microfinance in Africa: is it either the problem or the solution?” World Development 25(7): 1081-1094. http://www.socsci.ru.nl/maw/cidin/bamaci/scriptiebestanden/185.pdf/

Greer, P., 2008. “ Hitting its Mark: Microfinance and the Alleviation of Poverty.” http://www.thecollaboratoryonline.org/w/images/Hitting_the_Mark.pdf/

Gordon, D., 2005. “Indicators of Poverty and Hunger, the UN Document.” Accessed May 42011, http://www.un.org/esa/socdev/unyin/documents/ydiDavidGordon_poverty.pdf/

Harper, M., Rao, D.S.K., and Sahu, A.K., 2008. Development, Divinity and Dharma. The Role of Religion in Development and Microfinance Institutions, Practical Action Publishing, Rugby, UK.

Irobi, N.C., 2008. “Microfinance and Poverty Alleviation: A case of Obazu progressive women association, Mbieri, imo state – Nigeria.” Degree Thesis, Uppsala University, Sweden. Accessed February 15 2011, http://expsilon.slu.se:8080/archive/00002849/01/Irobi_N_080923.pdf/ Karnani, A., 2007. “Microfinance Misses its Mark.” Stanford Social Innovation Review, Summer.

Kessler, E., and Arkush, M., 2009. “ Keeping Faith in Development: The Significance of Interfaith Relations in the World of Humanitarian Aid and International Development Organizations. ” Woolf Institute, Cambridge, UK. Accessed April 19 2012, http://www.woolf.cam.ac.uk/assets/pdf/woolfinstkeepingfaith03.pdf/

Khan, M. A., and Rahman, M. A., 2007. “Impact of Microfinance on Living Standards, Empowerment and Poverty Alleviation of Poor People: A Case Study on Microfinance in the Chittagong District of Bangladesh.” Master’s thesis, Faculty of Social Sciences, Umeå School of Business, Umeå University, Sweden. http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-1497/

Khavul, S., 2010. “Microfinance: Creating opportunities for the poor.” Academy of Management Perspectives August: 57-71.

Kirmani, N., and Zaidi, S., 2010. “The Role of Faith in the Charity and Development Sector in Karachi and Sindh, Pakistan.” Religions and Development Working Paper 50, Birmingham, UK.

Marshall, K., 2005. “Faith and development: rethinking development debates.” June 2010, The World Bank, Washington DC.

Martin, J. P., Chau, J., and Patel, S., 2007. “Religions and international poverty alleviation: the pluses and minuses.” Journal of International Affairs vol. 61(12): 69-92.

Mersland, R., D’Espallier, B. and Supphellen, M., 2013. “The effect of religion on development efforts: Evidence from the microfinance industry and a research agenda.” World Development vol. 41 (c): 145-156.

MIX (Microfinance Information Exchange), 2010. MIX Global 100. http://www.themix.org/sites/default/files/2009%20MIX%20Global%20100%20 Composite.pdf/

Morduch, J., 2000. “The microfinance schism.” World Development 28(4) (April): 617-629.

Morse, S., and McNamara, N., 2009. “The universal common good: Faith-based partnerships and sustainable development.” In Sustainable Development, Sage Publication, Park, CA, 17(1): 30-48.

Oliver. R. L, 1997. Satisfaction: A Behavioral Perspective on the Consumer. The McGraw-Hill Companies, Inc. New York.

Prahalad, C K., 2005. Fortune at the bottom of the pyramid: Eradicating poverty through profits. Wharton School Publishing, Upper Saddle River, New Jersey.

Rahman, A., 1999. Women and Microcredit in Rural Bangladesh. Westview Press Oxford: 150.

Rhyne, E., 2010. “A tale of microfinance in two cities.” http://www.huffingtonpost.com/elisabeth-rhyne/a-tale-of-microfinance-in_b_795840.html/

Robinson, A., 2011. “Faith-based organizations and government funding – a research note.” Research Paper, Tearfund, UK.

Sachs, J. D., 2005. The End of Poverty: Economic Possibilities of Our Time. New York: Penguin

Sananikone, O., 2002. “Helping to improve donor effectiveness in microfinance.” Donor Brief, Microfinance and the Millennium Development Goals, Consultative Group to Assist the Poor (CGAP) December 9, Washington DC.

Sengupta, R., and Aubuchon, C., P., 2008. “The Microfinance Revolution: An Overview.” Federal Reserve Bank of St. Louis Review January/February, 90(1): 9-30.

Srnec, K., and Svobodová, E., 2009. “Microfinance in Less Developing Countries: History, Progress, Present – Charity or Business.” Agricultural Economics 2009, vol. 55: 467-474.

UNFPA (United Nations Population Fund), 2008. “Culture Matters: Lessons from a Legacy of Engaging Faith-Based Organizations.” Accessed July 1 2009, www.unfpa.org/webdav/site/global/shared/documents/publications/2008/Culture_Matter_II.pdf/

United Nations (UN), 2013. http://www.un.org/apps/news/story.asp?NewsID=45308&Cr=millennium%20development%20goals%20&Cr1=#.Uh1MoszrZjp/ van Engelenhoven. 2006. “Faith and Fortune.” Centre for International Development Issues Nijmegen (CIDIN)

Yin, R. K., 1994. Case study research: Design and methods (2nded.). Newbury

Chapter 2 Microfinance and Poverty Alleviation

The first chapter introduced the overall framework of the study. It explained the major steps leading to the formation of research questions. A framework of questions was prepared with one main question and five sub-questions that fulfill the overall objective of the study. Chapters were also assigned to each sub-question in order to answer the research questions in detail.

Chapter Two deals with the first theoretical sub-question which is: “Describe the mainstream models of microfinance, the state of the microfinance sector and the critical issues that highlight the need for an alternative model.” The discussion is divided into five sections: the general introduction to microfinance is presented in section 2.1, models of microfinance intervention are presented in section 2.2, methods and factors of impact assessment of microfinance institutions are discussed in section 2.3, the issues giving rise to the need for an alternative model are discussed in section 2.4, and the discussion is concluded in section 2.5.

2.1 Overview of Microfinance

Microfinance is a development methodology that hinges mainly on the provision of financial services to the poor. Rubach, Bradley and Brown (2010) have adopted Brau and Woller’s definition that “microfinance refers to the informal and formal arrangements that offer financial services to the poor.” Microfinance covers mainly savings and credit for beneficiaries who do not have access to commercial banks or any formal financial institution (Ejigu 2009; Lafourcade et al. 2005; Wollni 2001). Microfinance includes other financial services such as ‘micro-leasing,’ ‘micro-insurance,’ and ‘payment transfers’ (Irobi 2008). The existence of such informal financial services is not new. For instance, Rotating Savings Associations, Credit Unions, and Thrift and Credit Societies have been operating for a long time (Anthony 2005; Mayoux 2001) and have been mainly intended to help the low-income group (Irobi 2008). Srnec and Svobodova (2009) trace evidence of microfinance to the 18th century in the form of the Irish Loan Funds and also in Middle Europe in the early 19th Century.They further mention that “several credit union systems and cooperative banks have been named after Raffeisen, Kampelik etc.”

In India the development of microfinance has been attributed to distinguished individuals such as Muhammad Yunus of Grameen Bank in Bangladesh, Ela Bhatt of SEWA Bank in India, Akhtar Hameed Khan of Tameer Bank in Pakistan (Srnec and Svobodova, ). Among all these ventures, the Grameen Bank stands out as the most prominent institution that arose from a setting of dire hardship.

Srnec () has divided the evolution of microfinance into four periods. The first was the Expansion period (1970-1980), distinguished by expansion of the microfinance to several less developed countries and also characterized by informal microfinance institutions. The second was the Growth period (1980-1990), represented by an increase in the number of institutions and beneficiaries. The third, the Commercialization period (1980-1990), was marked by the entry of more formal institutions and the support of both government and non-government agencies. The fourth period was called the Transformation/Secularization period (1990-present); it is the present stage when informal microfinance institutions are transforming into formal institutions and also where international organizations have entered the market.

2.1.1 Key Principles of Microfinance

The basic operating principle of microfinance is generally considered to be loans to the poor. In addition, microfinance offers other services such as ‘savings,’ ‘insurance,’ ‘remittance services’ and even ‘micro-equity.’ Its objective is the alleviation of poverty along with the provision of capital Otero (1999). It provides business avenues to the poor so that the beneficiary can climb the economic ladder out of the ‘poverty trap’ (Crabb 2008). A remarkable feature of microfinance is its sustainable delivery of financial solutions to “the problems of building volume, keeping loan repayment rates high, retaining customers, and minimizing scope for fraud” (Roodman and Qureshi 2006). Microfinance is also able to provide effective and efficient services to a large number of poor clients (Kiiru 2007). Another characteristic noted of microfinance is the general application of group-based loans that innovatively shifts two basic banking obligations, namely, determining credit worthiness and cost of contract enforcement to the clients themselves (Roodman and Qureshi 2006) and reiterated by Kiiru and Mburu (2007).

‘Microfinance Institutions’ include a range of different organizations. Ledgerwood (1999) listed various forms of microfinance institutions such as ‘non-governmental organizations,’ ‘savings and loan cooperatives,’ ‘loan unions,’ ‘government banks,’ ‘commercial banks,’ or ‘non-bank financial institutions.’ The target individuals are categorized as ‘poor’ and their financial services are characterized by ‘small savings’ and ‘small loans.’ The main groups targeted by microfinance are women, peasants and small businessmen. No collateral is required for microloans; instead, various methodologies use different forms of guarantees and collateral. Some also assess the business activity of the poor where coverage extends to ‘rice lenders,’ ‘buffalo lenders,’ ‘savings groups’ and ‘women’s groups’ (Kaboski and Townsend 2005).

Karlan and Goldberg (2006) enumerate the following important features of microfinance organizations as:

a) “Small transactions and minimum balances (whether loans, savings or insurance)”
b) “Loans for entrepreneurial activity”
c) “Collateral-free loans”
d) “Group lending”
e) “Targeted poor clients”
f) “Targeted female clients”
g) “Simple application processes”
h) “Provision of services in underserved communities”
i) “Market-level interest rates”

Murray and Boros (2002) add a few more characteristics, namely,
a. “Small amounts of loans and savings”
b. “Short-terms of loans (usually up to the term of one year)”
c. “Payment schedules involve frequent installments (or frequent deposits)”
d. “Installments made up from both principal and interest, amortized in course of time”
e. “Higher interest rates on credit”
f. “Easy accessibility to the microfinance institution”
g. “Simple application procedures”
h. “Short processing periods (between the completion of the application and the disbursement of the loan)”

A common characteristic of these organizations is their broad social mission to serve a low income clientele (poor and very poor) and to develop ‘income-generating activities’ which help raise the standard of living and eradicate poverty.

2.1.2 State of the Microfinance Sector

The microfinance sector across the world is reportedly growing in size. Earlier, any consolidated report on the industry was not available but archival studies based on historical datasets are now being presented to the industry. Institutions like Microfinance Information Exchange (MIX), Micro Banking Bulletin, Sadhan and others maintain databases to which micro-financing institutions voluntarily contribute data. Cull et al. (2009) and Ahlin et al. (2010) possess analytical studies based on the data available through these media.

Microfinance Information Exchange (2010) report that there are 1,785 microfinance institutions which have submitted their financial statements to the exchange. Khavul (2010, p. 68) reveals that “the gross loan portfolios so far tracked amount to $39.5 billion and savings deposits $22.7 billion.” He further writes that “the 76.9 million borrowers included in the MIX database have an average loan balance of $576.5.” Lindsay (2010) estimates that “presently over 120 million people currently benefit from the services of over 10,000 microfinance institutions paying interest rates of between 15 and 35%.”

Several reports on the competitiveness and performance of microfinance institutions are also available. The MIX Global 100 provides a periodic analysis of the regional performance of microfinance across the world with its latest data released in January 2010 (MIX 2009, p. 25). Kiiru (ibid) found that “the most profitable microfinance institution in 2009 was from Africa with an average of 30.90 percent return on assets, followed by another in Asia with an average of 30.2 percent return on assets.” Lapenu and Zeller (2001, p. 27) support the view that “Asia is the most developed continent in the world in terms of volume of MFI (microfinance institution) activities.” Another fact raised by Kiiru (ibid, p. 25) is that “on average, the top 100 most profitable microfinance institutions worldwide have an average of 10.44% return on assets.” This finding is confirmed by the MIX data. In fact, MBK Ventura, SDBL, Shakti, GFSPL, all from Asia, are the biggest microfinance institutions in terms of scale of service. The growing microfinance sector has been commented on by Sanjay Sinha, MD, M-CRIL that: “Grameen Bank alone disbursed $4 billion in microloans over the last 10 years, and it now has 7 million borrowers in Bangladesh” (Karnani, 2007). here are also well-performing MFIs serving a wide range of client groups in South and Central Asia, Latin America and Africa who have achieved commercial success and have become profitable over time. Christen et al. (2004) disclose in a CGAP study that “over 750 million savings and loan accounts in developing and transition countries” are in Alternative Financial Institutions. They continue that “these AFIs include state-owned agricultural, development and postal banks, member-owned savings and loan institutions, other savings banks, low-capital local and/or rural banks and specialized microfinance institutions and programs (MFIs) of varying types.”

In another study Gonzalez and Rosenberg (2006) reported that “approximately 10% of microfinancing organizations served 75% of the borrowers.” Khavul (2010, p. 62) has cited the analysis of Cull et al. (2007, 2009) of 346 microfinance institutions. They note that “45% are non-governmental organizations (NGOs), 30% are non-bank financial institutions (not-for profit and for-profit institutions that have regulatory permission to take client deposits etc.) and 10% are banks, with the remaining organizations spread across other types.”

In addition, Reille and Glisovic-Mezieres (2009) have found that the industry has gained the interest of private equities and other investors with “approximately 100 private equity funds that manage close to $6.5 billion.” The microfinance sector has also witnessed the introduction of public offerings, notably in Mexico and India. Khavul (ibid) highlights alternative sources of capital inflows to the sector. She notes that “MicroPlace, which is owned by eBay, allows individuals to use PayPal to invest relatively small amounts that are then bundled together with investments from others and routed to micro-financing organizations in the developing world.” Cull et al. (2009) in their study demonstrate the high profitability of non-government organizations and banks operating in microfinance. They have shown that in terms of Return on Investment (ROI), banks generally perform better than non-government organizations.

In India, the entry of microfinance as a poverty alleviation tool is relatively new. In spite of this, the industry has increased significantly in both outreach and volume, and the potential market is huge. Shetty (2008) states that “about 238 million people in India live below the poverty line with a per capita income of less than one dollar per day.” Though some providers such as SEWA Bank in Gujarat started offering microfinance services as early as the 1970s, the industry only started to gain momentum in the 1990s. The government of India has also been experimenting with microfinance as a tool of poverty alleviation along with other development programs. The Self-Help Group Bank Linkage program of National Bank for Agricultural and Rural Development marked the significant recognition of this neglected sector.

Microfinance in India operates mainly on the principles of the Self-Help Group - Bank Linkage and the Microfinance Institution Method. In the former, banks give loans directly to Self-Help Groups and in the latter, the microfinance institutions borrow funds from banks and sometimes also raise funds from other sources to lend to the poor. Karnani (ibid) citing Sanjay Sinha shows that “about 1,000 microcredit organizations and 300 commercial banks lent $1.3 billion to 17.5 million people in 2006 in India.”

Microfinance institutions in India are registered under the ‘Societies Registration Act, 1860,’ ‘Indian Trust Act, 1880,’ ‘State Cooperative Societies Act,’ ‘Mutually Aided Cooperative Societies Act (MACS),’ ‘Multi-State Coop. Societies Act, 2002,’ ‘Section 25 of the Companies Act, 1956 (not for profit)’ or ‘NBFC MFIs incorporated under the Companies Act, 1956 and registered with RBI.’

Moreover, a trend reported worldwide regarding unregulated NGO-MFIs (Lapenu 1998) holds true for Indian microfinance sector as well. A report from Sa-Dhan (2006) states that “of the 1000+ MFIs in the country today, perhaps 400-500 continue to operate in the form of registered societies or trusts. Another 300-400 MFIs in India operate as cooperatives either under the conventional state-level co-operative acts.” Shetty (2009) also finds that “an estimated 80% or more of the 2,000 MFIs in India are registered as philanthropic societies and are essentially unregulated (NGO-MFIs).” So far, there is no particular agency or institution regulating the sector.

The goal of financial inclusion has always remained present in the planning commission and fiscal policies of the Indian government but the achievement of this goal needs much more effort. M-Cril (2010, p. 9) reports that: “With 26.7 million borrower accounts the size of the microfinance sector now more than matches significant parts of the Indian financial system in terms of the number of citizens affected.” The sector has kept up momentum and is growing fast. Ghate (2007) remarks that microfinance in India is increasing its outreach to the poor segment towards inclusion of the 80% population excluded from mainstream finance.

NABARD (2009) reported that “as of March 2009, a total of 6,121,147 SHGs had invested Rs 5,545.62 in savings with banks. On the other hand, a total of 12,253.51 cr loans had been disbursed to 1,609,586 SHGs and thereby registered 38.5% and 31.1% growth respectively.” It is also mentioned that “states like Andhra Pradesh, Tamil Nadu, and Karnataka which had a higher presence of SHGs witnessed a higher level of credit deepening than states like Jharkhand, Bihar, and Madhya Pradesh.”

The NABARD Report (2010) presented in Table 1 presents the achievement of the NABARD SBL program. It reports that 6.9 Million Self-Help Groups were linked with banks out of which 5.3 Million were exclusively women SHGs. In terms of amount, cumulative loans sanctioned up to March 31 2010 stood at INR 107.66 crore (USD .

Table 1: NABARD SBL program

illustration not visible in this excerpt

2.1.3 Role of Microfinance in Financial Inclusion and Poverty Alleviation

Microfinance is seen as a potential tool of financial inclusion and poverty alleviation. Financial inclusion as defined by the Rangrajan Committee Report (2008) is “the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.” A number of studies (Littlefield et al. 2003; Simanowitz and Brody 2004) argue that microfinance is the most effective tool of attaining the UN Millennium Development Goals and establishing an articulate financial sector for the poor. Khan and Rahaman (ibid, p.33) state: “All microfinance programs target one thing in general: human development that is geared towards both the economic and social uplift of the people they cater for.” Several studies have shown the relationship among microfinance, financial inclusion and development. Schumpeter (1959) was one of the earliest proponents of the view that: “Financial services are paramount in promoting economic growth” and that one “can only become an entrepreneur by previously becoming a debtor.” Sahoo et al. (2008) developed an index of financial inclusion and reported “the positive impact of infrastructure development, education, self-help group formation on financial inclusion both from financial widening and deepening perspectives.”

Sharma (2008) also from an empirical study affirmed the relationship between financial inclusion and development. Similarly Sanghwan (2006) reported a positive relationship between SHG-Bank linkage programs and financial inclusion. Irobi (ibid) states that using direct engagement with the poor fills the accessibility gap to financial services. It allows the poor to start their own enterprises, overcome vulnerability, create assets and obtain immunity against sickness and calamities (Zeller and Myer 2002). Along with its impact on poverty alleviation, positive effects have been seen in regard to the reduction of vulnerability (Adamu 2007), women’s empowerment (Ledgerwood 1999), increase in household savings (Hulme and Mosley 1996) and infrastructure development (Sahoo et al. 2008).

Karnani (ibid) cites Amartya Sen’s view that: “Poverty alleviation cannot be defined only in economic terms but it is also about addressing a much broader set of needs.” Vulnerability, education, health, household assets, dignity, self-respect, nutrition and other non-monetary variables also serve as an indicator of poverty alleviation. Therefore microfinance programs should target the development of both social and economic conditions by the provision of financial services. Edgcomb and Barton (1998) use the term ‘credit-plus’ for non-credit services such as savings, insurance, health services, adult literacy or training that go beyond financial services.

The positive impact of microfinance on the living conditions of the clients has been recorded at various levels. Some studies describe the impact at individual and household level (Bali Swain 2004; Morduch 1999; Chowdhury et al. 2005). Categorizing the concept of poverty into objective and subjective poverty, they found that micro credit lowered both forms of poverty. Other studies have documented the positive impact of microfinance on consumption, income and the net worth of households. Karlan and Zinman (2006) in South Africa; and Khan and Rahaman (2007) in Bangladesh reported the positive impacts on economic conditions and poverty status. Researchers have found widespread evidence of improvement in economic conditions with the major indicators of the positive effects of microfinance being changes in “household income and business profits” (Ramola and Mahajan 1996; Fisher and Mahajan 1997). It has been suggested that income smoothing has had positive effects on ‘transitory’ poverty (McCulloch and Baulch 2000). UNCDF (2009) also supports the view that microcredit facilitates economic growth, resulting in “vulnerability reduction,” characterized by “poor households’ risk-bearing ability, risk-coping strategies and consumption smoothing over time” (Shetty ibid).

Khan and Rahaman (ibid) report that microfinance institutions also work towards improving health conditions since the poor have the greatest health issues. Again, access to productive capital leads to the development of a sense of dignity, autonomy, and self-confidence (Khan and Rahaman 2007; Robinson 2001). Pronyk et al. (2007) also support the view that microfinance has positive current and future implications for the poor. A study found a positive relationship between microfinance and the possession of household items (Barnes 2006). Chen and Snodgrass (2001) in their study of microfinance clients in India found improvement in household conditions, and that clients who borrowed many times boasted better stocked households in terms of possession of items.

Women have been the focus of most poverty alleviation programs worldwide and the empowerment of women is closely tied with improvement in the socio-economic condition of households. Boyle (2009) finds that microfinance affects household living conditions through female participation in the microfinance programs. Littlefield (2005) also probed the impact on women and reported that microfinance helps women to manage their own enterprises, while at the same time taking care of their off-spring as well as the health and complete well-being of the family. Khan and Rahaman (2007) found that women, who were the major beneficiaries of microfinance, experienced positive changes and were active participants in community life. Khandker (2006) supported the positive relationship of microfinance and poverty alleviation in his study based on a panel household survey in Bangladesh. Basargekar (2009) also focusing on women offers this opinion: “Women’s access to credit and savings will help them take a bigger role in decision-making, which will further help them to optimize their own as well as their family’s welfare. Investment in women’s activities is also likely to enhance employment opportunities for women and increase the income at the household level. Access to savings and credit facilities also enables women to increase expenditure on themselves and their children and to prevent leakages in the household income on unproductive/harmful expenses. Group formation also leads to wider social and political movements and helps women upgrade their status at home as well as in their community.”

2.2 Models of Microfinance intervention

Microfinance organizations are fairly diversified and may comprise non-government, private or public-private partnerships as well as a growing number of profit-making organizations (Battilana and Dorado 2010).

Many microfinance institutions use the ‘life cycle strategy’ for administering the delivery of financial services to poor entrepreneurs. Broadly, this life cycle strategy can be classified on two fronts: Lending methodology and Approach. Most of the microfinance institutions vary in terms of their lending methodology. Cull . () classify microfinance institutions into three types on the basis of lending method: ‘group lending,’ ‘village banking,’ and ‘individual-based lending.’ In terms of approach, microfinance institutions follow either a ‘maximalist’ or ‘minimalist’ approach. Ledgerwood () reports that some institutions apply the minimalist approach, believing that only credit is the required block. On the other hand, the maximalist or integrated approach offers a “range of financial, social intermediation and entrepreneurial services” to its clients (Zeller and Richard 2002).

Delivery models are categorized into two: group-based and individual-based. The common examples of group-based models are the Self-Help Group (SHG) method, the Grameen model and the Joint-Liability Group (JLG) method which are expanded as follows.

2.2.1 The Grameen Model

The Grameen Model is a group-based model pioneered by the Grameen Bank. Many microfinance institutions now use an adapted form whereby loans are disbursed from the branches. These models are largely based on the group-lending methodology and have undoubtedly contributed significantly to outreaches. Microfinance, using this group-based method, generally locates its branches in close proximity to the clients using simplified procedures. In the Grameen method, the total number of members, mainly women, is five but the credit varies from place to place (Murray and Boros, ). Though the model helps in lowering transaction costs, it does involve certain ‘social costs’ such as “coercive peer pressure, loss of faith and the likelihood that the poorest and most vulnerable will remain excluded or further stigmatized” (Khan and Rahaman, , p. 26).

2.2.2 Individual Banking Program

In this method, the banks as well as financial institutions lend directly to the borrowers. This method is also characterized by flexibility in the size of lending and in customizing its tenure to suit the borrowers’ needs but within certain fixed parameters (Matovu 2006). Khan and Rahaman (ibid) have cited the examples of BASIC BANK (Bangladesh), Bank Rakyat Indonesia (BRI) in Indonesia, and ADEMI in the Dominican Republic as institutions lending to individual borrowers.

2.2.3 Credit Unions

These institutions operate on the premise that a direct relationship exists between saving and borrowing especially in a closed group. The members save money in small groups and then on-lend their own savings to the needy as loans. These practices are a continuation of ancient forms of lending that predate the modern financial system especially in rural areas.

2.2.4 Village Banking

The Village Banking concept initiated by John Hatch in Latin America is also a prominent model existing in the world. This methodology largely depends on external support in the formation of groups, collection of savings and collective issuing of loans to group members. However, in this case an external sponsoring agency supports the process by injecting funds. Interest rates are decided on the basis of market rates and the loans are gradually increased to a maximum limit. The size of the group also varies from 30 to xxx members.

The loan repayment period is initially on a weekly basis with full repayment in sixteen weeks. In the final week the entire loan amount is repaid to the funding agency. The village banks have two accounts to maintain – an internal and external one. The village receives external funds into the external account. Once the total amount of the loan is repaid, the funding agency provides the second cycle of loans.

2.2.5 Self Help Groups/Associations

Murray and Boros (ibid, p. 12-13) report that “Rotating Savings and Credit Associations (ROSCAs) exist in several parts of the world but are recognized under different names, such as Tontines and Susus.” These associations are membership-based, with women as the main participants. These women save in small amounts and then lend to each other from that pool. A similar structure is a Self-help Group, consisting of a small group of members who are in some way related to each other or share some common needs. They also save their money in small amounts and provide loans to one another without collateral.

Under the co-operative-SHG linkage program, groups can be formed directly by the different branches of co-operative banks or via Primary Agricultural Credit Societies PACS. The composition of these SHGs may be different and can range from five to nine members. The interesting feature is that the group themselves decide which members to accommodate without any external pressure. After the group is formed, the process of saving begins, which is one of the binding conditions on the members. The saved amount is then lent and the borrowers are made liable to pay, exerting group pressure as a kind of social collateral. Over 60% of Indian MFIs rated by M-CRIL use the SHG model to provide microfinance services (Shetty and Veerashekarappa 2009).

2.3 Impact Assessment of Microfinance Institutions

Impact assessment is an important process of microfinance and other development tools. It is defined as “eports are used to show the performance of the particular microfinance institution in realizing the goal of financial sustainability and social impact, which are together called the ‘double bottom line.’

In the past, many of the studies used a qualitative approach and the researchers had to examine the SHGs to measure the impact on a case-by-case basis. Present impact studies also try to establish quantitatively the effect of microfinance programs on the socio-economic condition of the beneficiaries. The common impact assessment involves a comparison between those who received the program and those who did not. However, this method has its limitations. As Mosley (1997) has pointed out, there is the issue of exogeneity, or endogeneity, in the comparison between before and after intervention; and the possibility of recall bias in the absence of baseline. A comparison between the treatment group and control group also faces the problem of ‘endogeneity,’ that is, correlation between the explanatory variable and error term. Dichter and Harper (2007), too, have commented on the current lack of rigorous statistical studies of impacts.

2.3.1 Types of Impact Studies

The above-mentioned methodologies give rise to different types of impact studies, which are discussed in the following section.

a. Comparative Studies

In a comparative study, ‘the treatment group’ is compared with ‘the control group,’ a commonly used method in many impact studies. One of the earliest and most comprehensive impact assessments using this method was conducted by Khandkar () in Bangladesh, who found that 40% of the entire poverty reduction in Bangladesh could be attributed to microfinance. This positive effect was confirmed by Chen and Snodgras (study of SEWA Bank. They compared the income levels of the group who received the microfinance service with those who did not and found that those who participated in the SEWA Bank’s programs had a higher level of income.

Not all reports were positive. Adams (2002) found that microfinance did not have any significant impact on the living conditions of clients. Kiriti (2005), analyzing the effect of repayment on economic conditions, found that some clients lost their assets in the course of repaying their loans mainly because the business did not yield much profit. In an early impact study, Gulli (1998) found that groups below the poverty line tended to utilize the loan amount for their household needs and not for entrepreneurial purposes, as was commonly assumed. This was confirmed by Coleman (2006) who reported similar findings, including the fact that it was the groups above the poverty line and richer members who benefited more from microfinance services. He also found that many female members below the poverty line left the group because they found the credit amount far too low to meet their needs or positively impact their incomes.Kiiru (ibid) in his study cites Mosley who reported:“In any given cohort roughly 25% showed spectacular gains to borrowing, 60-65% stayed about the same, and 10% to 15% went bankrupt.”It may be inferred from these studies that the impact of microfinance on the poorest is low in comparison to the impact on the less severely poor.

There are many researchers who propose that microfinance programs need to be packaged with child-education, family health and other non-financial services. Wahid (1994) proposed that a microfinance program must be evaluated on the basis of its impact on the level of employment created for the society. Bagaserkar (2009) conducting an impact assessment on the microfinance program of a microfinance institution in Maharashtra, India, found differing impacts on variables. While the programs affected income and assets only marginally, household savings had increased significantly. Positive impact was also seen on ‘self-esteem,’ ‘self-respect’ and ‘leadership qualities.’

b. Randomized Control Trials

Randomized controlled trials (RCT) are used to determine the cause-effect relationship between treatment and outcome. A significant application of randomized control trials was seen in Dupas and Robinson (2009) but the focus was mainly on micro-savings rather than microcredit. Another study (Bauchet et al. 2011) using the RCT method found that consumer credit produced significant benefits. This research, which provided a detailed analysis of late repayment, revealed, contrary to the claim of high repayment, that the rate of repayment was much lower even after a grace period. Banerjee et al. (2009) in another randomized control study reported that “micro-financing clients did not show improvements in health, education, or women’s empowerment.” Evans et al. (1999) reported that non-member individuals were at a lower echelon economically and a higher level of vulnerability than members because the former did not possess any assets or land.

In relation to the application of RCT to female subjects, Cheston and Kuhn (2002) found a positive impact of microfinance on ‘women empowerment’ as seen in the trend towards adopting birth control, child schooling and ownership of assets. Mayoux (2001) in a study in Cameroon found similar effects on ‘women empowerment’ by way of propensity to earn more, possession of money, and social participation. Sabharwal (2000), in a 5-part study on the effect of weekly meetings, concluded that the weekly women’s gatherings made positive contributions to the ‘empowerment’ of the poor.

c. Pre-post studies

Several impact studies use the pre-post method to assess the impact of microfinance programs. The main feature of this method is that “(at least) two measurements are made on the same experimental unit: the pre-test measurement made prior to the administration of a treatment or intervention and the post-test measurement made at a point in time reasonably afterward” (Dimitrov and Rumrill 2003). Adams (ibid) in a study of the effect of microfinance on 100 maize farmers in Ghana found that microfinance had a negligible effect on their lives. Basargekar (ibid) did an empirical analysis of the effect of microfinance based on the responses of 217 participants of a self-help group used as a tool of corporate social responsibility by Forbes Marshall in India. She reported that the program helped in the ‘economic empowerment’ of participants who were poor. Another empirical study (Panda 2009) used the pre-post method to assess the effect of microfinance programs based on a self-help group model. She used an econometric analysis of the data obtained from a sample size of 60 respondents from three Indian states to study several the impact of the program on several factors such as “income, savings, employment, migration, literacy position, decision-making” of the beneficiaries.

Most of the impact studies are conducted either with the comparison between before-intervention and after-intervention, or a comparison between ‘the target group’ and ‘a control group’ across selected variables.

2.3.2 Factors of Impact Assessment

The various impact studies discussed in the above section dealt with the following factors in assessing the impact of microfinance programs.

A. Condition of Poverty

The stark reality of poverty is highlighted by Shah (2013) that:“a Deaton (2006) echoes this fact, reporting that about “1.2 billion people live in extreme poverty, or on less than $1 per day, and an additional 1.6 billion live on between $1 and $2 a day.” Matovu (ibid, p. 55) classifies the poor into: “destitute, extreme poor, moderate poor and vulnerable non-poor.”

While there is a tendency to view poverty solely in terms of income or lack of it, a clear conceptual understanding of ‘poverty’ is required before any proper discussion or research on the particular condition can be done.

The condition of poverty includes much more than simply the non-fulfillment of ‘basic needs.’ Murty et al. (2013, p. 8) believe that “the escalating income and savings, and building the assets are not the only means to fight the poverty.” Kiiru (ibid) defines poverty as “the inability to attain a certain predetermined minimum level of consumption at which basic needs of a society or country are assumed to be satisfied.” The main emphasis of this perspective is that inaccessibility to essential human requirements constitutes the condition of poverty. The United Nations Development Program defines poverty as “a lack of human capabilities in the Amartya Sen’s sense” (UNDP 2002). Another definition is that the poor are “persons, families and groups of persons where resources (material, cultural and social) are so limited as to exclude them from the minimum acceptable way of life in the member states in which they live” (UNESCAP 2000).

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