MCM608 CU -Sem II - Mcom -Microfinance Management (3)-converted

MASTER OF COMMERCE SEMESTER-II MICROFINANCE MANAGEMENT MCM608 1 CU IDOL SELF LEARNING MATERIAL (SLM)

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Prof. (Dr.) R.S.Bawa Pro Chancellor, Chandigarh University, Gharuan, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Coordinator – Dr. Rupali Arora Coordinator – Dr. Simran Jewandah Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Coordinator – Dr. Raju Kumar Coordinator – Dr. Manisha Malhotra Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Coordinator – Dr. Aman Jindal Coordinator – Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel &Tourism Management) Coordinator – Dr. Samerjeet Kaur Coordinator – Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Coordinator – Dr. Ashita Chadha Coordinator – Ms. Neeraj Gohlan Academic and Administrative Management Prof. (Dr.) R. M. Bhagat Prof. (Dr.) S.S. Sehgal Executive Director – Sciences Registrar Prof. (Dr.) Manaswini Acharya Prof. (Dr.) Gurpreet Singh Executive Director – Liberal Arts Director – IDOL © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: TeamLease Edtech Limited www.teamleaseedtech.com CONTACT NO:- 01133002345 For: CHANDIGARH UNIVERSITY 2 For: InCstiHtuAteNofDDIiGstAanRceHanUdNOInVlinEeRLSeaIrTnYing CU IDOL SELF LEARNING MATERIAL (SLM) Institute of Distance and Online Learning

For: CHANDIGARH UNIVERSITY 2 CU IDOL SELF LEARNING MATERIAL (SLM) Institute of Distance and Online Learning

For: CHANDIGARH UNIVERSITY 2 CU IDOL SELF LEARNING MATERIAL (SLM) Institute of Distance and Online Learning

First Published in 2020 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the even the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit -1 Introduction To Microfinance ...............................................................................................4 Unit -2 Evaluation Of Microfinance ...............................................................................................15 Unit -3 Ethics In Microfinance ........................................................................................................31 Unit -4 Microfinance In India..........................................................................................................41 Unit -5 Microfinance Models ...........................................................................................................51 Unit -6 Issues, Trends And Frontiers Of Microfinance Behaviour ..........................................61 Unit -7 Funding And Financing MFIs ...........................................................................................78 Unit -8 Capital Markets....................................................................................................................88 Unit -9 Debt Capital Markets Financing .....................................................................................102 Unit -10 Equity Capital Markets Financing ................................................................................109 Unit -11 Microfinance Investment Vehicles.................................................................................115 Unit -13 MFI Micro Insurance......................................... 134Unit -14 MFI Commercialization ...................................................................................................................................................... 147 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT -1 INTRODUCTION TO MICROFINANCE Learning Introducti Structure Demand Objectives on Microfina Approach Definition for Microfinance Summary Core Principles for Microfinance Keywords Learning and Supply of Microfinance Unit End The Demand for Microfinance Suggested The Supply of Microfinance 5 nce Innovative Concepts es and Financial Inclusion Activity Questions Readings LEARNING OBJECTIVES After studying this unit, you will be able to: • Explain the concept of microfinance • List various innovative concepts of microfinance • Discuss the demand & supply of microfinance • State the approaches towards financial inclusion in microfinance CU IDOL SELF LEARNING MATERIAL (SLM)

INTRODUCTION Definition of Microfinance Microfinance is the provision of a broad range of financial services such as – deposits, loans, payment services, money transfers and insurance products – to the poor and low-income households, for their microenterprises and small businesses, to enable them to raise their income levels and improve their living standards. Core Principles for Microfinance • The poor needs access to appropriate financial services • The poor has the capability to repay loans, pay the real cost of loans and generate savings • Microfinance is an effective tool for poverty alleviation • Microfinance institutions must aim to provide financial services to an increasing number of disadvantaged people • Microfinance can and should be undertaken on a sustainable basis • Microfinance NGOs and programs must develop performance standards that will help define and govern the microfinance industry toward greater reach and sustainability DEMAND AND SUPPLY OF MICROFINANCE The Demand for Microfinance Traditionally the targets of microfinance meant “the poorest of the poor” and “the poor”. More, recently, microfinance focus is changing as it has now started serving people who, although, not living in poverty, have general difficulty in obtaining the credit (Torre and Vento, 2006). This is on account of socio-economic changes that have put forward potential new microfinance clients. In this way, modern microfinance is expanding its horizon from “poorest of poor” to “the victims of financial inclusion”. The phenomenon of financial inclusion has been defined in literature as “inability to access finance in an appropriate way”. These victims of financial inclusion involve “disadvantaged individuals” who are unable to bear the cost and conditions of financial products offered. Another category of microfinance target included the “marginalized people” who mainly comprise of small-scale entrepreneurs who are running small businesses, self-employed workers and individuals who unable to obtain credit (Torre and Vento, 2006). In this category, women assume major significance. This is due to the more responsible nature of women who are more responsible in repayment of loan then men. The continuing involvement of “poorest of the poor”, “poor”, “disadvantaged” and “marginalized” people determines the greater complexity of the supply forces of Indian microfinance structure and thus, a more decisive move away from traditional pattern ofcredit. 6 CU IDOL SELF LEARNING MATERIAL (SLM)

The Supply of Microfinance In any economy, most of the day-to-day activities require finance. Finance is required both for productive and non-productive purposes. The productive purposes include requirement of fixed capital for commencement of business, funds for working capital requirement to meet day today activities, trade related emergencies, exploring investment opportunities etc. On the other hand, finance may be needed for non-productive purposes, such as for celebration of marriages, births and deaths, for litigation. In order to satisfy in above needs there are two available sources of credit available to the poor: institutional sources or formal sources, non-institutional sources or informal sources. Formal institutions are the registered entities subject to all relevant laws. These include commercial banks (including public and private sector banks), regional rural banks and cooperative banks. Recognizing the potential of micro finance to positively influence the development of the poor, the Reserve Bank, NABARD and Small Industries Development Bank of India (SIDBI) have taken several initiatives over the years to give elevation to the micro finance movement in India. The Commercial Banks and Regional Rural Banks provide both short term and long term funds for serving the poorest of poor. The Primary Agricultural societies (PACS) provide mainly short term and medium term loans and Land Development Banks provide long term loans. The National Bank of Agricultural and Rural Development (NABARD) is the apex institution at national level for agricultural credit and refinance assistance to the agencies mentioned above .The Reserve Bank of India (RBI) as the central bank of the country plays a crucial role by giving overall direction for providing credit and financial support to national bank for its operations. On the other hand, government owned societies like Rastriya Mahila Kosh (RMK), Mutually Aided Cooperative Societies, private sector companies like specialized NBFCs are also involved in providing credit to the poor. Informal institutions include self-help groups, money lenders, traders, relatives, commission agents. They are providers of microfinance services on a voluntary basis and are not subject to any kind of regulation. MICROFINANCE INNOVATIVE CONCEPTS Microfinance provides financial services (products) to clients that are considered “unbankable” by the conventional financial institution. Microfinance institutions (MFIs) also develop new techniques and methods (processes) to ensure that the services both reach the targeted clients - and yield profits. MFIs innovate in terms of rules and procedures to ensure clients’ repayment. This includes training policies and human resource management practices which aim at modifying financial facilities and structuring the working units to provide services. (This resembles accounts of incremental innovation). The impact of the new product can be major, especially in the developing world, where 7 CU IDOL SELF LEARNING MATERIAL (SLM)

many microfinance schemes and services bring new products to markets, occasioning strategic changes in financial services (so having more of the characteristics of radical innovation), and also impacting upon clients by pressing them to undertake new business processes in order to achieve creditworthiness. As already discussed, among the innovative features of microfinance are: •n ew methods of providing credit to the borrowers (e.g., the usage of social collateral such as group guarantee instead of personal physical collateral, progressive lending approach, peer pressure and peer monitoring); •a pproaches to mobilization of savings from the clients and linking credit provision to savings; •e mphasis on social mobilization processes, involving awareness building and formation of self- help groups, and •P rovision of other services, such as insurance, to cover risks and distress faced by the clients. Microcredit is probably the most prominent of the financial service innovations covered by the term “microfinance”. Other services that the term covers include micro savings, money transfer vehicles and microinsurance. These services have become diversified and attracted not only small family business and SMEs in developing economies, but also to small (but fast growing) small companies in developed countries. This reflects the universality of credit2 3 and its importance in many development contexts. APPROACHES AND FINANCIAL INCLUSION 8 key approaches to accelerate financial inclusion 1. F oster a diversity of financial institutions. Inclusive financial sectors have many types of financial institutions beyond commercial banks – postal banks, microfinance institutions, credit cooperatives – that apply various business models and operate in different geographic regions to serve distinct customer segments. A legal and regulatory framework that allows for entry of diverse institutions and applies proportionate regulation and supervision tailored to their respective levels of risk is critical to reaching customers that aren’t fully served by commercial banks. Policies that promote a healthy, competitive environment and level playing field across all providers are also necessary. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

2. F acilitate the use of innovative technologies and entry of technology-driven, non-traditional institutions. We’ve both spent a lot of time in China recently, and no country better illustrates what can be achieved by innovative approaches driven by non-traditional players such as Alibaba (an e-commerce company) and Tencent (a social networking platform). In many countries, innovative providers are leveraging technology, existing customer networks, infrastructure, and big data to lower transaction costs and deliver financial products well- suited to the needs of low-income consumers. As noted in the G20 High-Level Principles for Digital Financial Inclusion, a clear legal and regulatory framework is needed to allow for new technologies and players, while also addressing the risks that arise from innovation. Close monitoring of market developments through a ‘test and learn’ regulatory approach can be employed to address this concern. 3. E xpand agent-based banking and other cost-effective delivery channels. Relying solely on brick-and-mortar branches has long been recognized as a key obstacle to financial inclusion. Regulatory approaches can help overcome this obstacle by allowing for the use of low-cost delivery channels such as local retail shops serving as agents for financial service providers and “lite” branches. Such approaches can cost-effectively expand the physical presence of financial service providers while providing meaningful benefits to those reached. 4.I nvest in supervision and leverage technology to optimize limited resources. A financial sector that is not well-supervised from a prudential or market conduct point of view is unlikely to be inclusive. Indeed, implementing many items on this list requires effective supervision. Yet we rarely come across a country where capacity constraints are not a perennial issue, meaning a risk-based approach to supervision is often required. Supervisors in Austria, Rwanda, and elsewhere are also turning to technology to help automate reporting and conduct supervisory analyses, an approach often referred to as “Regtech.” 5.I mplement risk-based, tiered AML/CFT requirements. According to the World Bank’s Global Findex, over 300 million adults worldwide cite excessive documentation as a major obstacle to opening an account. A flexible, risk-based AML/CFT regime, combined with a comprehensive, accessible national identification scheme (for example, allowing for digital identification or using biometrics) are critical to overcome this obstacle. Simplifying documentation requirements or adding exceptions for certain applicants (e.g. low-income) or products (e.g. small-value, low-risk transactions) can let the “good guys” in while still keeping the “bad guys” out. 6. E 9 CU IDOL SELF LEARNING MATERIAL (SLM)

ncourage the development of low-cost, innovative financial products. The underserved face unique obstacles and have unique financial needs. Policymakers should establish regulatory frameworks that encourage the development of appropriate financial products, such as basic bank accounts and microinsurance, that address the needs of underserved, low-income customers. Customer-centric product design that overcomes behavioral barriers and increases utility should also be promoted. 7. S trengthen financial infrastructure. Information asymmetries and lack of collateral are often obstacles to the underserved accessing financial services. Expanding credit reporting systems and collateral registries (including for movables) and improving the efficiency and accessibility of retail payments systems can increase access to financial services. The government plays a critical role in strengthening financial infrastructure, which serves as the underlying foundation to support financial inclusion, as the World Bank-CPMI Payments Aspects of Financial Inclusion (PAFI) report emphasized. 8. P rotect consumers by establishing rules for disclosure, fair treatment, and recourse. It is critical that consumers be protected from potential abuse and are treated fairly by providers. The World Bank’s Good Practices for Financial Consumer Protection emphasizes the need for providers to present customers with clear information on the terms and conditions of products via a standardized form in order to facilitate comparison shopping, help consumers make informed financial decisions, and avoid risks such as over indebtedness. Authorities should also put in place regulations that restrict abusive business practices and make recourse mechanisms easily available. All of the above items share several characteristics: they are complex, require coordination between public and private sector stakeholders, and call for high-level policy commitment and resources for implementation. SUMMARY •M icrofinance is a way of living and a source of livelihood to the poor. It has been proved through different kind of researches that microfinance aims at providing different kinds of financial products and services to the poor. Such products and services include Micro credits, Micro savings, Micro insurances, Financial and Social intermediations (subsidies, grants), Business Development Services (business training and skill development, backward and forward linkages, technology services), etc. •M 10 CU IDOL SELF LEARNING MATERIAL (SLM)

icro financing is an endeavor supported by the Government, government agencies, nationalized banks, NABARD, cooperative banks and various Microfinance institutions in the present economic system intending to alleviate poverty, provide better facilities to poor and improvement of standard of living of the poor and all round development of poor, especially poor women. For overall development of the country, women who constitute half of the population of country should grow in order to develop society as a whole. •I n India, Micro finance is of an ancient origin. Traditionally, Money lenders, zamindars (landlords), traders, etc. have provided micro credit to poor borrowers in rural areas at exorbitant rates of interest (Debadutta Panda,2009). There was no regulation on this kind of lending as it was informal in nature and it led to exploitation and difficulties for the poor. As a result of this, poor in rural areas faced lot of hardships and became poorer and poorer because of the burden of loan. •F urther, non-repayment of loans, unemployment, bonded labor, child labor, exploitation of women and unlawful and obligatory transfer of claim on assets added to their woes. As a result of this, the landless and poor farmers got more and more entangled in the vicious cycle of poverty. •H owever, in today‘s scenario, the entire concept of Microfinance has changed. It does not include any unfair, unreasonable practices or harassment to the poor. Rather, it is more about alleviating poverty, organizing the poor especially women into groups called Self Help Groups (SHG)‘, providing credit facilities at subsidized rates and providing employment opportunities by helping them set their own microenterprise. •M icrofinance and women empowerment goes hand in hand. Same is the situation with SHG and women empowerment. We can therefore say that Microfinance through the channel of Self Help Groups (SHG) helps in contributing to women empowerment. Women feel empowered financially after joining SHG. SHG helps them in generating income through economic activities, saving their money as well as getting credit facilities for starting their own businesses. •T his empowerment in women is due to various reasons, one of which is development of entrepreneurial qualities among SHG women. Women start their own enterprise with the help of SHGs which provide loans, training facilities etc. and make them more confident and outgoing. This support, further leads to overall development of women along with 11 CU IDOL SELF LEARNING MATERIAL (SLM)

development of entrepreneurial qualities in them. Women come together to work and understand the importance of team work and earning money for the wellbeing of their families. They can achieve many things as a group rather than on individual basis. •I nnovativeness is an important quality of an entrepreneur. However, for developing this quality, women should be provided training and development facilities. In the current study, majority of the women prefer the business related to making chapatti bhaaji and preparing food articles through SHGs. Making food article and meals is a quality in built in women and doesn’t require any special kind of training KEYWORDS • Microfina nce Robinson (2001) defines microfinance as ―small-scale financial services primarily credit and savings—provided to people who farm, fish or herd‖ and adds that it refers to all types of financial services provided to low-income households and enterprises. • Entrepren eurship - An entrepreneur is a person who has possession over a new enterprise or venture and assumes full accountability for the inherent risks and outcome. The term is a lone word from French and was first defined by Irish economist Richard Cantillon A female entrepreneur is sometimes known as entrepreneurs. However, Entrepreneur in English is a term applied to type of a personality who is willing to take upon herself or himself a new venture or enterprise and accepts full responsibility for outcome. (Veira, X. (2008). • Self Help Group (SHG) - Self Help Group (SHG) is a village-based financial intermediary usually composed of between 10-15 local women. Members make small regular savings contributions over a few months until there is enough capital in the group to begin lending. Funds may then be lent back to the members or to others in the village for any purpose (Tripathy, U., & Padhi, P., 2011). • Joint Liability Group (JLG) - A Joint Liability Group (JLG) is an informal group comprising preferably of 4 to10 individuals coming together for the purposes of availing bank loan either singly or through the group mechanism against mutual guarantee. The JLG members would offer a joint undertaking to the bank that enables them to avail loans. The JLG members are expected to engage in similar type of economic activities like crop production, etc. The management of the JLG is to be kept simple with little or no financial administration within the group (NABARD, 2006) 12 CU IDOL SELF LEARNING MATERIAL (SLM)

LEARNING ACTIVITY Define 1. State the microfinance D 2. S principles of microfinance E D UNIT END QUESTIONS A A. Descriptive Questions M 1. p iscuss demand of microfinance for a bank. m 2. s tate use of supply of microfinance in Insurance company. 13 3. valuate the innovative concepts related to microfinance for NBFC. 4. iscuss the approaches to accelerate financial inclusion. 5. nalyze microfinance provided for a retailer. B. Multiple Choice Questions (MCQs) 1. icrofinance provides credits to a. oor and low-income households b. icroenterprises c. CU IDOL SELF LEARNING MATERIAL (SLM)

mall businesses A M d. T ll of these F M 2. icrofinance is an effective tool for poverty alleviation A L a. S rue M L b. 14 alse 3. eaning of financial inclusion is a.i nability to access finance in an appropriate way b.i nability to procure finance c.i nability to repay finance d. ll of these 4. term loans and Development Banks provide a. hort b. edium c. ong CU IDOL SELF LEARNING MATERIAL (SLM)

5. _ is the apex institution at national level for agricultural credit and refinance assistance to the agencies a. R BI b. S IDBI c. N ABARD d. S EBI Answers: 1. d 2. a 3. a 4. c 5. c SUGGESTED READINGS • Branch, Brian & Janette Klaehn. (2002). Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings. Washington: PACT Publications. • Dowla, Asif & Dipal Barua. (2006). The Poor Always Pay Back: The Grameen II Story. Bloomfield, Connecticut: Kumarian Press Inc. • Hirschlan d, Madeline. (2005). Savings Services for the Poor: An Operational Guide. Bloomfield CT: Kumarian Press Inc. • Sapovadi a, Vrajlal K., (2006). Micro Finance: The Pillars of a Tool to Socio-Economic Development. New Delhi: Prentice Hall of India. • Ledgerwo od, Joanna and Victoria (2006). Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. World Bank, 2006. • Rutherfor d, Stuart. (2000). The Poor and Their Money. New Delhi: Oxford University Press. 15 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT -2 EVALUATION OF MICROFINANCE Le arn Structure ing Ob CU IDOL SELF LEARNING MATERIAL (SLM) jec tiv es Int rod uct ion Ma rke t Ev alu ati on of Mi cro fin anc e– Pro du cts an d Ser vic es So cia l Ev alu ati on of Mi cro fin 16

anc e So cia l Va lue in Mi cro fin anc e Op era tio nal Ev alu ati on Re ve nu e Mo del s of Mi cro fin anc e Su m ma ry Ke yw ord s Le arn ing Ac tivi ty 17 CU IDOL SELF LEARNING MATERIAL (SLM)

Un it En d Qu esti ons Su gg est ed Re adi ngs LEARNING OBJECTIVES After studying this unit, you will be able to: • Explain the products & services related to microfinance • State the social evaluation of microfinance • Describe the revenue models of microfinance INTRODUCTION Microfinance is the provision of loans and other financial services to the poor. The microfinance has evolved due to the efforts of committed individuals and financial agencies to promote self- employment and contribute to poverty alleviation and provision of social security. India has been able to develop its own model of microfinance organizations in the form of savings and credit groups known as the Self Help Group (SHGs), which are bank-linked. These SHGs are mainly formed and managed by women and this has become an instrument, which has led to women's empowerment and social change. Most of the microfinance institutions in India attempt to go beyond savings and credit groups to provide microfinance services in the form of savings and insurance. Microfinance provides financial services to those whose income is small and unstable. These people are in need of credit facilities for several reasons (1) their needs are small and arise suddenly (2) the institutional providers of finance namely the banks demand collateral security which they cannot provide (3) most of the time, they are in needs of funds to meet their consumption demands, for 18 CU IDOL SELF LEARNING MATERIAL (SLM)

example, to meet expenses related to education, illness, funerals, weddings for which it is difficult to obtain institution finance (4) for purpose of investment in income generating activities. Concept of Self Help Group (SHGs) is the most exciting discovery in the context of microfinance. The Indian microfinance scene is dominated by SHGs and their linkage with Banks. Owing to the importance of microfinance and self-help groups in the eradication of poverty and in the empowerment of women. MARKET EVALUATION OF MICROFINANCE – PRODUCTS AND SERVICES (a) Micro credit: According to RBI, ―Micro credit can be defined as provision of thrift, credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards‖ (b) Micro savings: Micro savings can be referred to as the mobilization of very small savings from the poor. According to SEWA bank, ‘Poor women do not have a basic instinct for saving. they can and do save, if motivated and facilitated. (c) Micro insurance: Micro insurance can be defined as ― financial arrangements to protect poor and low income households against natural and artificial disasters and calamities and shocks through a specific structured mechanism for the exchange of regular premium payments proportionate to the likelihood and cost of risk involved‖ (Debadutta kumar Panda,2009) (d) 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. SOCIAL EVALUATION OF MICROFINANCE Some important new initiatives, however, have explored social aspects with a new definition of social performance that includes impact as the end-goal, but specifically unpacks the steps and practices taken to get there. The focus shifts from proving an end result to managing and reporting on those steps that are likely to lead to positive social outcomes. Social performance is seen not only as a result but as the process of achieving that result—and this can be reported on. The two main initiatives behind this shift are the Imp-Act program and the CERISE Social Performance Indicators Initiative (SPII).The Imp-Act program set out to establish what MFIs could do to improve (and prove) their impact. Social performance was defined as the effective translation of an institution’s mission into practice. This definition emphasizes that social performance is not only the end result (the impact) but a deliberate process of getting there. It reflects the concept of an 19 CU IDOL SELF LEARNING MATERIAL (SLM)

impact pathway (derived from the conceptual framework for impact assessment research), anchored in mission and leading to change, but contains several steps to work through so as to achieve change systematically (i.e., ‘put into practice’). The impact pathway can be represented as an arrow, with the main shaft representing the MFI’s governance, management, and strategic systems—the process; the arrow head represents the results: reaching target clients, meeting clients’ needs in line with their capacities, and ultimately achieving impact (see figure 1). The arrow points in one direction, but there is an iterative flow of information about the results (represented by the dotted line in the figure) feeding back into decision making. This enables an MFI to keep track of whether it is achieving its social mission and objectives, and contributes to an overall process of social performance management. The CERISE approach adopts the same MFI-centered definition of social performance, but adds objective concepts of social value (improving the lives of poor and excluded clients and their families and widening the range of opportunities for communities) and social responsibility (to clients, communities, staff). These may not be explicitly spelled out in an MFI’s objectives, but are assumed to be implicit and to have broad applicability, whatever the MFI’s stated goals Social Value in Microfinance The social value of microfinance relates to: •i mproving the lives of poor and excluded clients and their families; and • W idening the range of opportunities for communities. To create this value, the social objectives of an MFI may include: •s erving an increasing number of the poor (and people excluded from financial and other services) sustainably, and expanding and deepening outreach to poorer people; •i mproving the quality and appropriateness of financial services available to the target clients through a systematic assessment of their specific needs; • d elivering such services in a cost-effective way that offers low fees and fair interest rates on loans and deposits; •c reating benefits for the clients of microfinance, their families, and communities, that relate to social capital and social links, assets, reduction in vulnerability, employment 20 CU IDOL SELF LEARNING MATERIAL (SLM)

creation, income, access to services, and fulfillment of basic needs; •i mproving the social responsibility of the MFI towards its employees, its clients, and the community it serves; and •M onitoring and acting upon unintended negative side-effects of microfinance, such as over-indebtedness and multiple loans. Fig 2.1 Social Reporting and the IMP-Act Pathway OPERATIONAL EVALUATION The Indian microfinance sector presents a strong growth story and its growth performance was impressively sustained through the liquidity crunch and continued at an increased rate in the second half of 2009. As of March 2009, the MFIs in India reported a client base of 22.6 million with an outstanding portfolio of more than $ 2 billion. Over the past five years, the sector has delivered a CAGR of 86% in the numbers of borrowers and 96% in portfolio outstanding (Capital, 2010). The small beginning of linking only 500 SHGs to banks in 1992 had grown to over 0.5 million SHGs by March 2002 and further to 8 million SHGs by March, 2012. Together the 8 million SHGs of the poor maintain a balance of over ` 6,550 crore in the savings Bank accounts with the Banks. Over 4.4 21 CU IDOL SELF LEARNING MATERIAL (SLM)

million SHGs are regularly availing credit facilities from the Banks and during 2011-12 alone, over 1.15 million Groups availed loans amounting to ` 16535 crore from banks and together 404 million Groups have loans to the extent of ` 36340 crore outstanding against them with the financing banks as on 31.03.12, (NABARD, 2012). REVENUE MODELS OF MICROFINANCE “If you want to commercialize, please choose a different name … Real microfinanciers are not commercially minded. Grameen Bank and all my enterprises are not commercial entities but social businesses. … The ultimate objective of MFIs is to ensure financial inclusion and not making a profit. So long as they work towards this objective, they are microfinance companies and when they start looking at a profit they become loan-sharks or commercial entities. … He (Akula) was a nice person when he launched an NGO after visiting many of my social businesses in Bangladesh. … But what happened to him now, I don’t understand.” Coming from Muhammad Yunus, the Bangladeshi Nobel laureate who revolutionized the microcredit sector in his country, the statement needs to be taken seriously. Not that it is surprising, given his stand otherwise; but it is unusually strong for a man of his temperament. That gives me a feeling once again, that microfinance has come of age now – the time for discernment has arrived. There are basically two dimensions along which to categorize MFIs: Ownership and Revenue Model, as seen in the matrix below. That gives us four prototypes of MFIs: owned by beneficiaries, run on commercial revenue (Prototype A); owned by non-beneficiaries, run on commercial revenue (Prototype B); owned by beneficiaries, run on charity (Prototype C); owned by non-beneficiaries, run on charity (Prototype D). To evaluate Yunus’s statement in its true perspective, we need to place the MFIs he refers to in this matrix. He refers to true MFIs or “real microfinanciers” (as exemplified by “Grameen Bank and all my enterprises”) on one hand and “commercial entities” (as exemplified by Akula’s SKS). Now, 22 CU IDOL SELF LEARNING MATERIAL (SLM)

where do these two fit in the matrix? Fitting SKS is easy. It conforms to prototype B. But where does Grameen Bank fit in the matrix? The Notes to the Financial Statements for the year ended December 31, 2009 state as follows: “Grameen Bank was established as a body corporate under the Grameen Bank Ordinance 1983. … Members (borrowers) hold 96.57 percent of Grameen Bank shares. The remaining 3.43 percent is held by the Government of Bangladesh.” This, along with the perusal of the financial statements and information provided on the bank’s website (“Ever since Grameen Bank came into being, it has made a profit every year except in 1983, 1991, and 1992.”), would suggest that it conforms to prototype A. Now the difference between prototype A and prototype B is just this: in A the beneficiaries own the MFI, in B the non-beneficiaries own the MFI. But it is not this that Yunus seems to drive at in the statement given at the start. Where does the sore point lie then? 1. A ssociations Model This is where the target community forms an 'association' through which various microfinance (and other) activities are initiated. Such activities may include savings. Associations or groups can be composed of youth, women; can form around political/religious/cultural issues; can create support structures for microenterprises and other work-based issues. In some countries, an 'association' can be a legal body that has certain advantages such as collection of fees, insurance, tax breaks and other protective measures. Distinction is made between associations, community groups, peoples organizations, etc. on one hand (which are mass, community based) and NGOs, etc. which are essentially external organizations. Closely related to the group model and similar models. 2. B ank Guarantees Model As the name suggests, a bank guarantee is used to obtain a loan from a commercial bank. This guarantee may be arranged externally (through a donor/donation, government agency etc.) or internally (using member savings). Loans obtained may be given directly to an individual, or they may be given to a self-formed group. Bank Guarantee is a form of capital guarantee scheme. Guaranteed funds may be used for various purposes, including loan recovery and insurance claims. Several international and UN organizations have been creating international guarantee funds that banks and NGOs can subscribe to, to on lend or start microcredit programmes. 3. C ommunity Banking Model 23 CU IDOL SELF LEARNING MATERIAL (SLM)

Community Banking model essentially treats the whole community as one unit, and establishes semi- formal or formal institutions through which microfinance is dispensed. Such institutions are usually formed by extensive help from NGOs and other organizations, who also train the community members in various financial activities of the community bank. These institutions may have savings components and other income-generating projects included in their structure. In many cases, community banks are also part of larger community development programmes which use finance as an inducement for action. Closely related to the village banking model. 4. C ooperatives Model A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically- controlled enterprise. Some cooperatives include member-financing and savings activities in their mandate. 5. C redit Unions Model A credit union is a unique member-driven, self-help financial institution. It is organized by and comprised of members of a particular group or organization, who agree to save their money together and to make loans to each other at reasonable rates of interest. The members are people of some common bond: working for the same employer; belonging to the same church, labor union, social fraternity, etc.; or living/working in the same community. A credit union's membership is open to all who belong to the group, regardless of race, religion, color or creed. A credit union is a democratic, not-for-profit financial cooperative. Each is owned and governed by its members, with members having a vote in the election of directors and committee representatives. 6. G rameen Model The Grameen model emerged from the poor-focused grassroots institution, Grameen Bank, started by Prof. Mohammed Yunus in Bangladesh. It essentially adopts the following methodology: A bank unit is set up with a Field Manager and a number of bank workers, covering an area of about 15 to 22 villages. The manager and workers start by visiting villages to familiarize themselves with the local milieu in which they will be operating and identify prospective clientele, as well as explain the purpose, functions, and mode of operation of the bank to the local population. 24 CU IDOL SELF LEARNING MATERIAL (SLM)

Groups of five prospective borrowers are formed; in the first stage, only two of them are eligible for, and receive, a loan. The group is observed for a month to see if the members are conforming to rules of the bank. Only if the first two borrowers repay the principal plus interest over a period of fifty weeks do other members of the group become eligible themselves for a loan. Because of these restrictions, there is substantial group pressure to keep individual records clear. In this sense, collective responsibility of the group serves as collateral on the loan. 7. G roup Model The Group Model's basic philosophy lies in the fact that shortcomings and weaknesses at the individual level are overcome by the collective responsibility and security afforded by the formation of a group of such individuals. The collective coming together of individual members is used for a number of purposes: educating and awareness building, collective bargaining power, peer pressure etc. The Group model is closely related to, and has inspired, many other lending models. These include Grameen, community banking, village banking, self-help, solidarity, peer pressure etc. One example of the Group Model is \"Joint Liability\". When a group takes out a loan, they are jointly liable to repay the loan when one of the group's members defaults on the repayments. Several resources for the group model can be found in the Capacity Building for Microfinance section. 8.I ndividual Model This is a straight forward credit lending model where micro loans are given directly to the borrower. It does not include the formation of groups, or generating peer pressures to ensure repayment. The individual model is, in many cases, a part of a larger 'credit plus’s programme, where other socio-economic services such as skill development, education, and other outreach services are provided. 9.I ntermediaries Model Intermediary model of credit lending positions a 'go-between' organization between the lenders and borrowers. The intermediary plays a critical role of generating credit awareness and education among the borrowers (including, in some cases, starting savings programmes. These activities are geared towards raising the 'credit worthiness' of the borrowers to a level sufficient enough to make them 25 CU IDOL SELF LEARNING MATERIAL (SLM)

attractive to the lenders. The links developed by the intermediaries could cover funding, programme links, training and education, and research. Such activities can take place at various levels from international and national to regional, local and individual levels. Intermediaries could be individual lenders, NGOs, microenterprise/microcredit programmes, and commercial banks (for government financed programmes). Lenders could be government agencies, commercial banks, international donors, etc. Most models mentioned here invariably have some form of organizational or operational intermediary - dealing directly with microcredit, or non-financial services. Also called the 'partnership' model. Specifically see NGOs. 10. N GO Model NGOs have emerged as a key player in the field of microcredit. They have played the role of intermediary in various dimensions. NGOs have been active in starting and participating in microcredit programmes. This includes creating awareness of the importance of microcredit within the community, as well as various national and international donor agencies. They have developed resources and tools for communities and microcredit organizations to monitor progress and identify good practices. They have also created opportunities to learn about the principles and practice of microcredit. This includes publications, workshops and seminars, and training programmes. 11. P eer Pressure Model Peer pressure uses moral and other linkages between borrowers and project participants to ensure participation and repayment in microcredit programmes. Peers could be other members in a borrowers group (where, unless the initial borrowers in a group repay, the other members do not receive loans. Hence pressure is put on the initial members to repay); community leaders (usually identified, nurtured and trained by external NGOs); NGOs themselves and their field officers; banks etc. The 'pressure' applied can be in the form of frequent visits to the defaulter, community meetings where they are identified and requested to comply etc. The Grameen model extensively uses peer pressure to ensure repayment among its borrower groups. 12. R OSCA Model 26 CU IDOL SELF LEARNING MATERIAL (SLM)

Rotating Savings and Credit Associations or ROSCAs, are essentially a group of individuals who come together and make regular cyclical contributions to a common fund, which is then given as a lump sum to one member in each cycle. For example, a group of 12 persons may contribute Rs. 100 (US$33) per month for 12 months. The Rs. 1,200 collected each month is given to one member. Thus, a member will 'lend' money to other members through his regular monthly contributions. After having received the lump sum amount when it is his turn (i.e. 'borrow' from the group), he then pays back the amount in regular/further monthly contributions. Deciding who receives the lump sum is done by consensus, by lottery, by bidding or other agreed methods. 13. S mall Business Model The prevailing vision of the 'informal sector' is one of survival, low productivity and very little value added. But this has been changing, as more and more importance is placed on small and medium enterprises (SMEs) - for generating employment, for increasing income and providing services which are lacking. Policies have generally focused on direct interventions in the form of supporting systems such as training, technical advice, management principles etc.; and indirect interventions in the form of an enabling policy and market environment. A key component that is always incorporated as a sort of common denominator has been finance, specifically microcredit - in different forms and for different uses. Microcredit has been provided to SMEs directly, or as a part of a larger enterprise development programme, along with other inputs. 14.V illage Banking Model Village banks are community-based credit and savings associations. They typically consist of 25 to 50 low-income individuals who are seeking to improve their lives through self-employment activities. Initial loan capital for the village bank may come from an external source, but the members themselves run the bank: they choose their members, elect their own officers, establish their own by- laws, distribute loans to individuals, collect payments and savings. Their loans are backed, not by goods or property, but by moral collateral: the promise that the group stands behind each individual loan. The Village Banking model is closely related to the Community Banking and Group models. This model is widely adopted and implemented by FINCA. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

SUMMARY •M icrofinance is a concept that is helping the poor to avail of an create opportunities for economic growth. In India, microfinance has filled the efforts of rural development, women empowerment and wealth generation by providing small scale savings, credit, insurance and other financial services to poor and low-income households. Microfinance thus serves as a means to empower the poor and provides a valuable tool to help the economic development process. •T he concept of microfinancing and self-employment activities in rural areas has developed considerably over the last two decades. It is working neither on domain/charity nor on subsidy. It is basically rotational investment done to motivate the poor to empower themselves and practice the dictum 'Save for the future and use those resource during the time of need.' Theoretically, microfinance also known as microcredit or microlending means making provision for smaller working capital loans to the self-employed or self-employment seeking poor. •I ndian microfinance sector has made an outstanding growth over the last decade and has become an important part of Indian financial system. The sector has been well recognized for its contribution towards financial inclusion, women empowerment and poverty reduction. At the same time the sector encountered several criticisms internationally and nationally for its debated role in Andhra Pradesh crisis. Meanwhile, the Government, the RBI, MFIN and the MFIs themselves have taken various initiatives to ensure the social responsibilities, social performances and client protection in the sector. •A World Bank report notes that about 45.5 crore of India’s total population lives on Rs 55 per day. In such a scenario, it is only fair that the RBI retains the priority sector status of MFIs. Here lies the importance of microfinance, which recognizes the financial needs of the clients. Irrespective of their ability to offer collaterals, social-oriented microfinance meets the needs of the clients and saves them from exorbitant interest rates charged by moneylenders. MFIs are here with an aim of providing sustainable livelihood activities to the poor and thereby eradicating poverty. It was observed that it was not just low income and consumption that define poverty; there are social barriers like caste, gender, status, disability etc. too, which cannot be estimated. It's here that MFIs can play a crucial role through its business model and empower the people lying at bottom of the pyramid. •A nother fact that makes retaining priority sector status important is that microfinance is considered as responsible finance and not just mere money lending. Factors like accountability and 28 CU IDOL SELF LEARNING MATERIAL (SLM)

responsibility count high in case of MFI programs. It's true that India spends more on programs for the poor than most other developing countries i.e., 2% of GDP. This is three times higher than what China is spending. But due to faulty administration, most programs failed to meet the purpose. Even though the Mahatma Gandhi National Rural Employment Guarantee Program (MGNREGP) is a landmark achievement, we all know how negatively it has affected the output of small farmers who are finding it difficult to get labourers on time. •T he flourishing of small and medium enterprises is another reason that justifies the priority sector status to MFIs. Availability of funds on time is very important for the survival of SMEs, which contribute 45% to the national GDP. Marketing facilities offered by social microfinance organizations give international exposure to the products of small and micro entrepreneurs. •T he widely-debated Micro financial Sector (Development and Regulation) Bill was introduced in 2007, proposing important changes to the microfinance industry, but was never passed. In 2010, the Andhra Pradesh government issued the Microfinance Institutions Ordinance which requires all MFIs to register as well as adhere to other rules set forth in the ordinance. In response, RBI formed the Malegam Sub-Committee to make recommendations on how RBI ought to regulate the microfinance industry. In response to the Malegam Committee report, RBI issued a May 2011 circular implementing some of the Malegam recommendations through prudential requirements for microfinance loans to qualify for priority sector status. RBI subsequently created a new category of NBFC-MFIs in December 2011 and issued directions aimed at addressing responsible pricing, transparency and over-indebtedness. Additionally, in late June 2011, a revised •M icro Finance Institutions (Development and Regulation) Bill was introduced before Parliament, most notably proposing RBI as the sole microfinance regulator in the country. •T he microfinance environment in India currently consists primarily of microcredit, with other products not offered due to regulation or not offered widely due to various policy requirements. Microfinance in India is delivered through two channels, microfinance institutions (MFIs) and self-help groups linked to banks (SHG-Linkage program). •T he study revealed that MFIs, consisting of both for-profit and non-profit entities, reach 31.4 million customers with a total outstanding loan portfolio of 208 billion. MFIs mostly offer only credit through joint liability groups (JLGs), where group liability is substituted in place of collateral. Some MFIs are starting to offer individual lending options, sometimes using gold or other possessions as collateral. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

•T he vast majority of MFIs do not offer savings, insurance, or pension products due to regulatory restrictions. During the study, various literatures were reviewed on profitability and sustainability of microfinance institution (Barboer 2010,). For the purpose of the analysis and clear understanding the growth of MFIs, Ratio analysis was used to measure profitability, efficiency, productivity and self-sufficiency of NBFC Microfinance institution. The data was collected from micrometer and micros cape report of Micro Finance Institutions Network (MFIN) and the indicators used in this study are grouped into five categories: outreach, infrastructure, profitability, efficiency, productivity and self-sufficiency. The present study is based on the period starting from 2009 to 2013. •T he study found that the client outreach as well as the gross loan portfolio have been rapidly increasing from the financial year 2009 to the financial year 2013 (Except the F.Y. 2011-12), implying an increase in the demand for microfinance services. Staff productivity in Indian MFIs has improved consistently over the years and has now reached a level that is considered to be amongst the best in major regions offering microfinance. •M FIs are earning an adequate return on investments from the year 2009 to 2013 (except in the F.Y. 2011-12). Efficiency and productive ratio of MFIs continued to improve which indicates that the MFI industry uses their resources efficiently. Debt has become the dominant source of finance for Indian MFIs. The share of debts in MFI finances is high. The share of client savings and grants has reduced over the years. One reason is the increased awareness of MFIs as profit making entities which should have low reliance on grants. Another reason is the regulatory restriction on most MFIs in the mobilization of deposits. The financial viability of MFIs has also improved. Overall the MFIs registered a weighted average ROA of 1.66% reflecting good profitability from microfinance operations. The overall picture on sustainability is quite encouraging. Analysis of OSS and FSS indicates that the Indian MFIs have become more sustainable. This is mainly attributed to better management of operating and other expenses by the large and relatively young organizations. •I n 2010 and 2011, Operating Self Sufficiency of MFIs was more than 100 percent which indicates the MFI industry’s self sufficiency of income to cover the cost. In 2012 and 2013, OSS of sample MFIs is less than 100 percent due to involving high rates of default and subsequent reduction in lending. •D uring the year 2011-12, for the most part, the industry continued to struggle with the devastating 30 CU IDOL SELF LEARNING MATERIAL (SLM)

effects of the Andhra Pradesh Microfinance Institutions (regulation of money lending) Ordinance/Law, 2010. Funding constraints, negative perceptions combined with higher operating costs, remained all too real challenges to the growth of the industry. All indicators, viz., clients, GLP, disbursements, branches, employees, portfolio quality, and financial performance ratios, deteriorated. Not surprisingly, the decline was directly attributable to nonperforming portfolios in Andhra Pradesh (AP) and performance of AP based MFIs. It may be concluded, from the detailed analysis presented in the study that non-AP MFIs have, for the most part, succeeded in containing the impact of the AP crisis. This bears further evidence to the fact that the core NBFC-MFI model is robust and supportive regulation and policy directives can enable it to become the cornerstone of the architecture for addressing country’s financial exclusion woes. KEYWORDS • Below Poverty Line (BPL) - Below Poverty Line is an economic benchmark and poverty threshold used by the government of India to indicate economic disadvantage and to identify individuals and households in need of government assistance and aid. • Poverty - According to planning commission report ,2012 ― poverty is defined with reference to a poverty line which is the level of monthly per capita consumption expenditure considered to be a minimum necessary for living‖. According to Businessdictionary.com, ‗Poverty is a Condition where people's basic needs for food, clothing, and shelter are not being met. ‘ • Standard Of Living - According to the dictionary of banking and finance, standard of living is defined as the quality of personal home life (such as amount of food or clothes bought, size of family car, etc). • Empower ment / Women Empowerment - Chowdhury, S. S., & Chowdhury, S. A. (2011), state that Empowerment is a multifaceted, multi-dimensional and multi-layered concept. Women empowerment is a process in which women gain greater share of control over resources- material, human and intellectual (knowledge, information, ideas) and financial resource which leads to control over decision making in the home, community, society and nation. LEARNING ACTIVITY 1. Note on Self-help groups -SHGs. 31 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Explain the operational evaluation of microfinance UNIT END QUESTIONS A. Descriptive Questions 1. Describe the various products & services of microfinance 2. Explain the social values in microfinance 3. Diagrammatically explain the Social values & Impact pathway 4. Discuss in detail revenue model of microfinance 5. Justify evaluation parameters of microfinance B. Multiple Choice Questions (MCQs) 1. SHGs are bank linked a. True b. False 2. can be referred to as the mobilization of very small savings from the poor. a. Micro Insurance b. Micro Credit c. Micro savings 3. Remittances are a relatively source of funds a. Volatile b. Fluctuating c. Steady 4. The founder of microfinance was a. Dr. Manmohan Singh b. Muhammad Yunus c. Jaswant Singh 5. SPII stands for 32 a. Social Performance Indicators Initiative b. Social Performance Initiative Indicators c. Social Preference Indicators Initiative d. Social Presence Indicators Initiative CU IDOL SELF LEARNING MATERIAL (SLM)

Answers: 2. c 3. c 4. b 5. a 1. a SUGGESTED READINGS • Branch, Brian & Janette Klaehn. (2002). Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings. Washington: PACT Publications. • Dowla, Asif & Dipal Barua. (2006). The Poor Always Pay Back: The Grameen II Story. Bloomfield, Connecticut: Kumarian Press Inc. • Hirschland, Madeline. (2005). Savings Services for the Poor: An Operational Guide. Bloomfield CT: Kumarian Press Inc. • Sapovadia, Vrajlal K., (2006). Micro Finance: The Pillars of a Tool to Socio-Economic Development. New Delhi: Prentice Hall of India. • Ledgerwood, Joanna and Victoria (2006). Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. World Bank, 2006. • Rutherford, Stuart. (2000). The Poor and Their Money. New Delhi: Oxford University Press. 33 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT -3 ETHICS IN MICROFINANCE Le arn Structure ing Ob CU IDOL SELF LEARNING MATERIAL (SLM) jec tiv es Int rod uct ion Ro le of Eth ics in Mi cro fin anc e Le gal an d Re gul ato ry Co mp lia nce in Mi cro fin anc e Re 34

LEARNING OBJECTIVES gul ati After studying this unit, you will be able to: on an CU IDOL SELF LEARNING MATERIAL (SLM) d Co rpo rat e Go ver na nce Iss ues Su m ma ry Ke yw ord s Le arn ing Ac tivi ty Un it En d Qu esti ons Su gg est ed Re adi ngs 35

• State the ethics involved in microfinance • Discuss details of the legal & regulatory compliance in microfinance • Explain the regulation & corporate governance issues related to microfinance INTRODUCTION Not so long ago, the provision of small and very small loans and other financial services to relatively poor people in developing countries and the former socialist countries of Eastern and Central Europe, known as microfinance, was hailed as a fascinating and absolutely positive idea. It was supported by almost all policy-makers and development experts. The hype about microfinance reached its peak in late 2006, when the Nobel Peace Prize was awarded to Professor Muhammad Yunus and the Grameen Bank, the microfinance institution (henceforth abbreviated as MFI) in Bangladesh that he had founded in the 1970s. The Noble Peace Price had the effect that microfinance became suddenly widely known to the general public and regarded by many as the most humane part of the international financial system, perhaps even the only humane part. And indeed, the prize was awarded for good reason: anyone who strives for a fairer distribution of the opportunities for personal and economic development by providing loans as widely and effectively as Yunus and his bank have done for years is indeed promoting world peace, since lack of access to financial services is one of the main reasons why poverty is perpetuated, making massive 36 CU IDOL SELF LEARNING MATERIAL (SLM)

and long-term poverty one of the greatest threats to peace. Thus, there is obviously a manifest connection between microfinance and ethics. But as I write in the summer of 2011, the situation has changed in a fundamental way, and this is not only because the financial crisis has affected some MFIs as seriously as many other banks. Much more important is a plainly moral issue. In India, a series of suicides among borrowers who had obtained loans from MFIs occurred in 2010. These tragic events attracted great public attention and tarnished the formerly unambiguously positive image of microfinance. Suddenly general skepticism concerning microfinance has spread. Does microfinance work at all? Can it have any positive effects on poverty and development? Is the business model that many MFIs had adopted in recent years really appropriate? And is it justified to use public funds to support microfinance, as had been done on a considerable scale in past years? All of these concerns also touch on ethical issues. ROLE OF ETHICS IN MICROFINANCE The relationship between microfinance and ethics is certainly more complex than the Nobel Peace Prize for Yunus and his bank as a reward for discovering microfinance as a means of combating poverty suggests. The complexity goes beyond the doubts that had already been expressed by competent observers for quite some time as to whether microfinance is really a suitable instrument for combating poverty; even if this claim were inappropriate it would not imply that microfinance lacked any developmental or ethical value. My contribution to this volume discusses several aspects of the relationship between microfinance and ethics. The questionable role of microfinance for poverty alleviation, and the exaggerated claims made in this respect by Yunus and many of his followers are only a minor aspect of this debate. Of greater importance are the tensions that seem to exist between moral standards and economic imperatives in setting up and operating MFIs. More specifically, it is the role and the merits of what has become known as the commercial approach to microfinance. Lack of access to financial services is one of the main reasons why poverty is perpetuated, making massive and long-term poverty one of the greatest threats to peace. The term commercial approach to microfinance means a strategy of setting up and running MFIs in such a way that they can cover their full costs, including the cost of equity, after a short start-up period, and be permanently independent of subsidies from development aid institutions. Interestingly, Grameen has not adopted this approach, and Yunus has for many years been one of its most outspoken critics. However, since the turn of the millennium, the vast majority of microfinance experts have been convinced that there is no alternative to the commercial approach. For a few well- known institutions like Grameen Bank with an extremely eloquent and highly respected spokesperson like Muhammad Yunus, it may be a viable business model to simply do good and socially highly-relevant work while relying on outside support for covering the expected deficits of 37 CU IDOL SELF LEARNING MATERIAL (SLM)

these activities. But for the hundreds and even thousands of MFIs that have come into existence during the past 30 years, this is not the case. Therefore, any serious MFI must to some extent be commercially oriented. But the crucial question is this: how strong should, or even must, the commercial orientation of an MFI be? That too little commercial orientation can be a problem is self-evident, because a lack of financial viability would threaten the very existence of an MFI. The more interesting cases are MFIs whose activities reflect what I call excessive commercialization. Such cases exist, and they have recently attracted great attention. This is because those events that caused microfinance to lose most of its reputation and its moral appeal have precisely occurred at MFIs which I regard as excessively commercialized. Microfinance continues to be a socially, economically and morally valuable undertaking, provided that it is done properly and is based on a healthy dose of a commercial orientation. Recent developments have caused a moral crisis of microfinance resulting from excessive commercialization. The final proposition is that this excessive commercialization should and can be avoided. In order to develop and support these three propositions, section two describes how microfinance has developed and become a success story. Section three explains the substance of the 1990s controversy about the commercial approach. Then, in section four, I address recent developments which have led to the current moral crisis of microfinance. Integrity: • To provide low-income clients - women and men - and their families, with access to financial services that are client focused and designed to enhance their well-being, and are delivered in a manner that is ethical, dignified, transparent, equitable and cost effective. Quality of Service: • To ensure quality services to clients, appropriate to their needs, and delivered efficiently in a convenient and timely manner. • To maintain high standards of professionalism based on honesty, non-discrimination and customer centricity. Transparency: • To provide complete and accurate information to clients regarding all products and services offered. • To create awareness and enable clients and all other stakeholders to understand the information provided with respect to financial services offered and availed. Fair Practices: 38 CU IDOL SELF LEARNING MATERIAL (SLM)

• To ensure that clients are protected against fraud and misrepresentation, deception or unethical practices. • To ensure that all practices related to lending and recovery of loans are fair and maintain respect for client’s dignity and with an understanding of client’s vulnerable situation. Privacy of Client Information: • To safeguard personal information of clients, allowing disclosures and exchange of relevant information with authorized personnel only, and with the knowledge and consent of clients. Integrating Social Values into Operations: • To ensure high standards of governance and management. • To monitor and report social as well as financial data. Feedback and Grievance Mechanism: • To provide clients formal and informal channels for feedback and suggestions. • To consistently assess the impact of services in order to enhance competencies and serve clients better. • To provide a formal grievance redressal mechanism for clients. (from the MFI Industry Code of Conduct) LEGAL AND REGULATORY COMPLIANCE IN MICROFINANCE The legal framework for MFIs in India with reference to its registration and other parameters can be broadly narrated as under: •F or Societies – Registration for this is a very easy process with no minimum capital requirement. Further, they are not allowed for deposit mobilization/ collection from the public. It has to operate amongst its members only. •F or Trust—Registration for this is very easy with no minimum capital requirement. It is not allowed for deposit mobilization/ collection from the public. It is sometimes problematic as the funds for further expansion may not be available. It has limited scope for expansion. •F or Sec. 25 Companies—Registration is easy but not that easy as those of trusts and societies, especially for an existing company to convert into a Section 25 company. It is not allowed for 39 CU IDOL SELF LEARNING MATERIAL (SLM)

deposit mobilization/ collection from the public. However, it contributes a lot to the process of financial inclusion. •F or NBFC-MFI— Registration for this is to be taken up with RBI and it is difficult to obtain due to stringent provisions of the RBI. It requires minimum capital of Rs. 5 crores (Rs. 2 crores for North-East India region) to start MFI operations. It is not allowed for deposit mobilization/ collection from the public. It has a large scope and provides a good background for scaling up of the operations as it has investors’ confidence with it. It is observed that many MFIs in India, especially in South India and West Bengal, have grown and developed its activities/ operation remarkably. RBI is a strict regulator for MFIs and it monitors very closely from time to time. •F or Cooperative Societies— Registration for this is very easy (except in the state of Maharashtra) with the minimum capital requirement. It has very minimal regulatory requirements to fulfill in this matter. It is allowed to collect the deposits from its members only. It is relatively easy to scale up/ expand its activities. It is observed that many cooperative societies in Maharashtra and South India have progressed very much in terms of size and activities undertaken. There are many structural weaknesses of RRBs, cooperative societies, and urban cooperative banks, thus the microfinance movement has a remarkable presence in the Indian credit market. However, the RBI has clearly specified the regulatory framework for MFI which guide them to function smoothly and it is summarized as below: As per the RBI, NBFC – Microfinance Institutions means a non-deposit taking NBFC that fulfills the necessary conditions pertaining to minimum net owned funds, net assets criteria, qualifying assets criteria and other incidental requirements related to the loan disbursement to the members. The regulatory guidelines of RBI help a lot to grow, expand and develop the MFIs in a systemic way. REGULATION AND CORPORATE GOVERNANCE ISSUES Certain aspects of governance represent common challenges for MFIs. Among these challenges: •M anaging the potential tension between commercial profitability and the social aims of the organization: Sometimes known as mission drift, this can occur when commercial considerations outweigh social impact aims. • D etermining ownership and shareholding structures and transforming into regulated financial 40 CU IDOL SELF LEARNING MATERIAL (SLM)

institutions: There is often a lack of clarity, given that many MFIs evolve out of charities and non-governmental organizations. Ensuring that governance practices keep pace with rate of growth: This includes professionalizing boards, finding and compensating qualified candidates, providing board training, and setting up the appropriate governance structures for the organization to manage the increased risks that come with growth. SUMMARY •M icrofinance Institutions (MFIs) now reach 200 million people, mostly women without access to mainstream financial services living on, below and around the poverty line, with offers of small loans. The vast majority have as their twin objectives to alleviate their borrowers’ poverty and to enhance their empowerment. •T he paradox of microfinance is that a number of the practices used to achieve its objectives have the unintended consequence of undermining them. The concept that links the objectives of MFIs and the dangers in its practices is the relationship microfinance has with a borrower’s autonomy. The MFI intends that the loan increase autonomy by enriching and empowering the borrower. Its practices, however, can easily lead to charges of exploitation, coercion and paternalism, although in the latter case it is also argued that in certain areas, they are not paternalistic enough. It is argued that these latter concepts are considered wrongful, when they are, just because of how they relate to autonomy. The structure of the thesis is thus to consider the concepts of exploitation, coercion, and paternalism and then apply these concepts to the practices of microfinance. •T he module concludes with an empirical survey of how far microfinance has in fact achieved its objectives of poverty reduction and empowerment, in order to judge whether the infringements on autonomy incurred in its practice can be justified. It then considers the extent to which the way the benefits and burdens of microfinance fall - those whose lives do indeed go better or worse after engaging with microfinance, and by how much - affects our judgement as to whether microfinance should be supported. Finally, suggestions are made as to changes to practices that could be made so as to keep the pursuit of the ethical objectives, but minimize the risk of unethical practice in fact. •M icrofinance is a movement to provide financial services (e.g. credit, savings, insurance) to the poor, who are excluded by conventional financial institutions. At the core of conventional 41 CU IDOL SELF LEARNING MATERIAL (SLM)

banking is the idea that the poor cannot be provided credit or other financial services due to lack of collateral. By using innovative practices (e.g. group lending, dynamic incentives, taking the bank to the poor) microfinance tries to overturn this idea. The overarching objective of microfinance is poverty reduction, although it also aims to promote education, health, gender empowerment and improved social consciousness. •M icrofinance can be seen as shaping and being shaped by a new “developmentalist” discourse that has arisen in the wake of disenchantment with state-led development planning. Important components of this discourse include a larger reliance on NGOs and the private sector (instead of the state), a retreat from the belief that transformation of property relations (e.g. land reform) is necessary for poverty reduction, and the explicit incorporation of gender. At its core, microfinance embodies the vision of multilateral organizations (e.g. World Bank), aid agencies, and policy makers about development, although it entails the participation of the “subjects” of development. We can describe it as a strategy based on “civil society” to achieve development, albeit one conceived from above. We discuss below three central features of microfinance that rely on a common ethical principle KEYWORDS • Bank - According to the dictionary of banking and finance, bank is a business which holds money for clients, lends money at interest and trades generally in money. • Governm ent - According to the dictionary of banking and finance, Government is an organization which administers a country. • Governm ent Organisation - According to the dictionary of banking and finance, Government Organisation is an official body run by the government. • Nationalis ed Bank - According to the dictionary of banking and finance, A bank which is owned by the state is nationalized bank. LEARNING OBJECTIVES 1. Explain the contribution of Muhammad Yunus 42 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Write a short note on ethics in microfinance UNIT END QUESTIONS Analyse Describe A. Descriptive Questions Explain 1. Discuss developments done by Muhammad Yunus & Grameen Bank in Bangladesh State your 2. role of ethics in microfinance in India 3. the legal framework for MFIs in India 4. the challenges of corporate governance in microfinance 5. opinion on the ethics involved in microfinance B. Multiple Choice Questions (MCQs) MFI was 1. India first practiced in Banglade a. b. Sri Lanka sh Pakistan c. d. 2. Lack of access to financial services is one of the main reasons why poverty is perpetuated. a. True b. False 3. requires no minimum capital Registrati on of a Societies a. Companie b. s 43 CU IDOL SELF LEARNING MATERIAL (SLM)

c. NBFC- MFI 4. Societies contributes a lot to the process of financial inclusion Trust a. Companie b. c. NBFC- s d. MFI 5. SEBI is the regulator of MFIs IRDA NABAR a. b. RBI c. b D d. Answers: 1. 3. a 4. c 5. d 2. a SUGGESTED READINGS • Branch, Brian & Janette Klaehn. (2002). Striking the Balance in Microfinance: A Practical Guide to Mobilizing Savings. Washington: PACT Publications. • Dowla, Asif & Dipal Barua. (2006). The Poor Always Pay Back: The Grameen II Story. Bloomfield, Connecticut: Kumarian Press Inc. • Hirschlan d, Madeline. (2005). Savings Services for the Poor: An Operational Guide. Bloomfield CT: Kumarian Press Inc. • Sapovadi a, Vrajlal K., (2006). Micro Finance: The Pillars of a Tool to Socio-Economic Development. New Delhi: Prentice Hall of India. 44 CU IDOL SELF LEARNING MATERIAL (SLM)

• Ledger wood, Joanna and Victoria (2006). Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. World Bank, 2006. • Rutherfor d, Stuart. (2000). The Poor and Their Money. New Delhi: Oxford University Press. 45 CU IDOL SELF LEARNING MATERIAL (SLM)

• Le arn UNIT -4 MICROFINANCE IN INDIA ing Ob Structure jec tiv CU IDOL SELF LEARNING MATERIAL (SLM) es Int rod uct ion Sta te Int erv ent ion in Ru ral Cr edi t Ba nk Lin ku p an d Pro gra m me Pro gre ss of SH G Ba 46

nk Lin ka ge Pro gra m me in Ind ia Go ver na nce an d the Co nst itut ion of the Bo ard of Va rio us For ms of M FIs in Ind ia Su m ma ry Ke yw ord s Le arn 47 CU IDOL SELF LEARNING MATERIAL (SLM)