Project Proposal-Micro Finance

by Priyanshi Mittal on Wednesday 23 February 2011, 6:59 PM | Category: Finance| View: 2502 views
 
 
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 1. BACKGROUND AND OBJECTIVES

 

 

 

 

 

 

 

 

 

BACKGROUND

Microfinance—both credit and savings—has potential to improve the well-being of poor people in developing countries. This project will explore practical ways to achieve that potential. However, the term microfinance was first introduced in 1990 with the specific connotation of encompassing microcredit and micro savings as well as other financial services, because savings were the forgotten half of rural finance. While the term is new, the concept is old if not ancient, with institutional origins for instance in European countries in the 18th and 19th century, Nigeria in the 16th century and India around 1000 BC.

 

 

 

 

 

Microfinance is that part of the financial sector which comprises formal and informal financial institutions, small and large, that provide small-size financial services in theory to all segments of the rural and urban population, in practice however mostly to the lower segments of the population. This bias is partly due to self-selection of clients and partly to the mandate of institutions according to the will of their owners or donors. Worldwide formal and semiformal Rural Micro financing Institutions (RMFIs) are in the hundreds of thousands; informal institutions are in the tens of millions. Sustainability is nothing new; without it the large numbers of informal MFIs could not have survived.

 

 

 

 

 

 

 

 

 

 

Size of financial services is relative and varies widely by the economic development of a country; rigid definitions of size can lead to exclusion and unintended consequences. Microfinance covers a wide array of microfinance institutions (MFIs), ranging from indigenous rotating savings and credit associations (RoSCAs) and self-help groups to financial cooperatives, rural banks and community banks as well as non-bank financial institutions (NBFIs) including credit NGOs, all the way up to development banks and commercial banks. They may also comprise moneylenders and private deposit collectors. In contrast to microcredit, microfinance proper refers to a system of financial intermediation between micro savers and micro borrowers; it may further include micro insurance and other financial services such as money transfer.

 

 

 

 

 

 

 

 

 

 

OBJECTIVE

The main objective of the proposal is to explore the impact of microfinance in terms of rural development and employment (positive or negative, and at distinct levels- individual/household, region).

 

 

 

 

 

Microfinance services are expected to contribute to rural development and poverty/vulnerability reduction. Emergency loans, savings and micro-insurance are expected to mitigate vulnerability. Microcredit is expected to strengthen local rural employment (diversification, self-employment, wage labour). Remittances are expected to improve the conditions of migration. While microfinance has been given much attention and resources by policymakers and donors, there are still controversies about whether and under which conditions rural microfinance can hold its promises.

 

 

 

 

 

 

 

 

 

 

2. STATEMENT OF THE PROBLEM

 

During the 1960s and 1970s the key issue in agriculture and rural development was agricultural production. Agricultural credit was but an input, next to improved seeds and seedlings, fertiliser, pesticides, tools and machines. The target group were farmers. The issue was how to disburse agricultural credit to farmers. The funds were provided by governments and donors. Disbursement mattered, not repayment. The main disbursement channels were agricultural development banks and projects. Agricultural credit was a service, not a business. The strategy had much to show: the green revolution, driven by technology, financed on credit, with subsidised interest rates. The produce was purchased by government at guaranteed prices. So impressive was the business of the green revolution that the business of the financial service was ignored. But when farmers didn't repay their loans, the banks didn't cover their costs and the governments ran out of money to finance the subsidies, the banking business finally failed, and so did the service.

 

 

 

 

 

Meanwhile, populations continued growing in India, increasing numbers of rural people could not live on agriculture alone. To survive they had to engage in numerous activities: on-farm, off-farm and non-farm. Rural households and rural economies got increasingly diversified. Access to finance was the limiting factor. Agricultural credit had been exclusive. It excluded all those who didn't own and till the land: labourers, micro-entrepreneurs, traders, women and large numbers of smallholders too poor to pay the bribes and too uneducated to do the paperwork. The unsatisfied demand prepared the ground for a revolution on the supply side: microfinance. Perhaps this should be called the blue revolution, blue being the bankers' colour. The new emerging issue was now how to link microfinance to rural development: through inclusive financial systems development.

 

 

 

 

 

 

 

 

 

 

3. RESEARCH QUESTIONS

a)    Rural microfinance and rural employment:

Q1: What is the impact of microfinance in terms of rural employment (positive or negative, and at distinct levels - individual/household, region)

Q2: what are the overall effects in terms of vulnerability?

Q3: Connectivity Issues- Are there political issues that should be explicitly considered?

 

 

 

 

 

b)  Microfinance as a process: governance, appropriation and quality of services

Q4: What are the processes through which microfinance institutions and their clients address the issue of improving the quality of the financial services, broadly defined as their ability to meet the local demand? What are the conditions for raising the prospect for those processes to lead to improved quality of financial services?

 

 

 

 

 

4. RESEARCH METHODOLOGIES

From a methodological perspective, the proposal intends to overcome some common shortcomings of microfinance impact studies,

·         The project will be based on the relevance, reliability and comparability of the empirical data. Therefore, the project relies heavily on the production of primary data, which implies a strong dedication in fieldwork.

·         However, use will also be made of secondary data when relevant, particularly for quantitative and spatial analysis, since it may allow for more options of cross-analysis.

·        Combination of local case studies and surveys wherever required, in order to consider the interplay of linkages between rural microfinance and employment can take place.

 

 

 

 

 

5. RESEARCH HYPOTHESIS

1. Our first hypothesis is that beyond individual characteristics such as entrepreneurial capacity, attitude towards risk, or cultural and identity features, the processes will depend on the combination of two sets of factors: (1) an enabling environment, including infrastructure, opportunities of access to other input, output and service markets, but also a supportive social setting; and (2) the quality of financial services, broadly defined as their ability to meet the local demand.

 

 

 

 

 

2. Our second hypothesis is that the governance of microfinance institutions, both at the internal and external level, plays a key role in their capacity to steer those processes in order to provide quality financial services.

 

 

 

 

 

 

3. Our third hypothesis is that clients also play a key role (formal as well as informal) in co-building the quality of financial services.

 

 

 

 

 

 

 

 

5. EXPECTED RESULTS

The project will lead to the following expected results:

• A contribution to the revisiting of theoretical and development approaches and concepts (rural employment and vulnerability; money, debt and finance; governance, participation and social responsibility, etc.)

• A methodological feedback on the combination of economics and anthropology, the combination of qualitative and quantitative approaches, and the comparative perspective.

• Operational outputs for microfinance practitioners in order to improve the quality of services

 

 

 

 

 

6. SCOPE OF THE PROJECT

The project will be based on the facts and figures from mid-1970s to 2006. The choice of the period of reference is very significant because India observed a tremendous rise of rural credit in 1970s and witnessed setting up of NABARD and its growth of services during these 30 years. 

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