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Micro Credit A Review R.RAVIKUMAR

Beyond Micro credit – vistar publications, New Delhi, V.Pugazhendi, Department of Economic analysis and research NABARD-Mumbai, Despite micro credit being given priority in the institutional credit structure for several decades its acceptability by the poor has not been fully achieved consequently the concept of micro finance has been introduced with inclusion of credit plus components and now this approach has come to be recognized and accepted as one of the new development paradigms for alleviating poverty through social and economic empowerment of the poor with special emphasis on women. The micro finance programme being practiced in India with Self Help Groups (SHGs) as the institutional arrangement with the support of non-government organizations (NGOs) and specialized micro finance institutions (MFI) has been considered as the largest programmes in the world. In this context the review is appropriate and timely in that it provides elaborate information and analysis on issues relating to micro credit. This is rich in information content and also documents the unique experiences of several experiments by institutions like BASIX, SEWA, Bank etc. In addition the book has presented views on eminent scholars in the field of Micro Finance on specified topics. This is organized in two parts. Part I attempts to broadly discuss a range of financial services such as savings credit and insurance that are being provided by Micro Finance Institutions supported by case studies from SEWA Bank, BASIX, MYRADA, CDF etc. Part  II analyses in greater depth the organizational and institutional issues of Micro Finance.

Malcom Harper : Attempts to bring the differences between the SHG and the Grameen Bank approach and spells out the advantages and disadvantages of each of them. Treatment of subsidy, empowerment, out reach and impact by these two approaches provide a better understanding for the reader. While concluding his paper the author has indicated the possibility of the groups being exploited and used by outsiders, which is a genuine concern.

Mathew Titus : discusses more about cost aspects of micro finance with illustrations on the components of the cost of SHGs with a case example from a group farmed by SHARAN an urban NGO. He also attempts to outline the factors that contribute to the cost of promotion and maintenance of SHGs. He has identified three sets of costs which include cost arising from historical loses, establishing and promoting a new set of organizations to provide and maintain an effective service. He has further demonstrated how market imperfections and dissortions affect the cost in Micro Finance approach.

Sanjay Sinha and Frances Sinha : Have summarized the efforts made by different MFOs to access the impact of micro finance programme. They have also discussed the issues involved in impact assessment of micro finance and have listed out the new initiatives. Ajith Kanitkar has highlighted the social entrepreneurship in the SHG movement in India. He has used the experience of PRADAN to quantify the issues in this regard. He has reemphasized the importance of leadership in maintaining and sustaining the fragile and vulnerable groups. He has also expressed concern on the maintenance of the autonomous nature of the groups.

The utation of literature and micro finance is adequate and the authors have identified suitable models for the discussion that have strengthened the arguments. But still there are numerous models on micro finance that are being innovated due to the diversified nature of social and economic environment of the poor in the country and it is impossible to document many such innovations in a single document. However this covers wider aspects of the innovations in the rural credit system and is a welcome addition to the literature on the subject.

There is a plethora of literature on the evolution and programs of micro finance but there are very few studies containing issues in sustainability of micro finance institutions Bankers Institute of Rural Development Deserves Compliments for bringing out a much needed treatise on micro finance. This is under review is an edited version of papers presented by the micro finance experts, practitioners, central bankers, developmental bankers and academicians in a work shop organized jointly by SIDBI and Bankers Institute of Rural Development. This gives a brief background of the emergence of micro finance institutions in India.

The emerging issues in micro finance sector such as design of financial product, their pricing need for regulatory frame work, information system and evolving proper rating system for MFIs have been brought out in a lucid manner. While the contents are quite relevant to the subject, their placement is not appropriate. These aspects should be covered in concluding remarks rather than burdening the readers with heavy doses then it takes off with the definition of micro finance and classification of micro finance institutions, while accepting the definition of micro finance as defined by Task Force on micro finance (NABARD-1999). The authors have pointed out no specific limit for a small amount of financial support is envisaged. It is interesting to note that micro finance in India has been defined as provision of thrift credit and other financial services and products of very small amounts to poor in rural, semi-urban and urban areas for enabling them to raise their income levels and to improve their standards of living.2

Two important issues require proper attention in this context (1) provision of small financial support in metropolitan areas not under the ambit of micro finance? A poor is whether he resides in an urban or metropolitan area. The geographical restrictions need to be removed to bring the poor in metropolitan areas under the micro finance fold. (2). Ambiguity of small amounts may lead to crowding out effect by provision of financial support to upper strata of the poor. There is a need to define small amounts ensure help to the poorest of the poor. Another issue relates to the definiton of MFIs. All those engaged in providing micro finance have been defined as MFIs. This has raised the aspiration of the NGOs to take up financial inter mediation Regulation of a large number of MFIs consisting of NGOs. Trusts foundations etc. is neither possible, nor fesible for the existing regulatory bodies or even for any specifically organized body for the purpose in future. At the same time, the interest of the small savers cannot be ignored. This is all the pertinent in the backdrop of the findings of the authors that majority of MFIs in India are subsidy dependent. However there is a silverline that operational self-sufficiency is positively related with the volume of business and the number of years in operations. This suggests that with the increase in volumes with passage of time MFIs would be in sound financial health, contains a paper by Vijay Mahajan an active practitioner of micro finance in India. In his paper Mahajan has pointed out that one way to enhance the financial sustainability of MFIs is broad ending of financial services, it provides. He suggested a wide range of non-conventional activities like inflation adjusted savings eg: Mutual funds long term credit for natural resources regeneration which includes water shed treatment, forest regeneration, social security unemployment benefits, old age pension, venture funding equity investment and commodity futures.

The definitions essentially seek to fore ground the purpose of micro finance programmes, the size of financial services offered and the target clientele of such programmes, the terms “micro finance” and “micro credit” have in the course of popular usage, come to signify not only the goal of reaching the financial assistance to a designated target population, but also to encompass a particular set of lending methodologies and transactional technologies, that set them apart from an earlier generation of credit programmes of development of the agricultural sector.

The conceptualization of poverty as a dynamic process rather than a static condition and a corresponding concern with unforeseen changes in income flows of poor households have placed vulnerability and raise management at the center of safety net based poverty interventions.

Morduch and Sharma further note that the emphasis laid on addressing income fluctuations derives from the realization that rise can be a great burden to carry for the poor and that the measures that poor households use to reduce risks can be detrimental and carry significant long term costs such as withdrawing children from schools reducing consumption of nutritious food curtailing investments on business assets neglecting social obligations, entering patron client relations on disadvantageous terms and selling productive assets.

High sustainability The formal financial sector may achieve financial sustain¬ability. but has little outreach to poor clients. Traditional efforts by non-governmental organisations (NGOs) may reach poor clients. but are often unsus¬tainable. Good micro-finance practice. on the other hand. combines both outreach and sustain ability. Such practice is perhaps most clearly embodied in the micro-finance bank. which marries the best of the formal financial sector in terms of sustainability with the outreach to poor clients of the development NGO.

This book argues that if such a framework is allowed to dominate debate and practice, as it often has. it will severely limit the potential developmental ends to which micro-finance. as a means or instrument. can be put. The industry has become dominated by a techno-managerial perspective. with a large number of technical manuals and courses on how to manage micro-financial services and financial sustainability. and how to achieve outreach. in the process, the develop¬ment impetus which first gave rise to micro-finance is often lost.

It is time to put development back into the provision of micro-financial services, and for this we need to go beyond micro-credit. Going beyond micro-credit has usually been framed in terms of including micro-financial services other than credit for micro-enterprise: savings. consumption loans and insurance in particular (Rutherford. 2000). In other words. micro-finance can embrace a range of financial ser¬vices that seek to meet the needs of poor people. both pro¬tecting them from fluctuating incomes and other shocks. and helping to promote their incomes and livelihoods (Rogaly 1999).

In this book we seek to explore developmental purposes to which micro-finance can be put that go well beyond integrat¬ing a range of micro-financial services for poverty allevia¬tion. We include livelihood promotion, developing the local economy, empowerment. building democratic people's organisations. and changing wider systems or institutions within society. We elaborate on the practice of using micro¬finance to address these developmental objectives in the first part of the book.

Putting development back into micro-finance presents challenges to all those involved in micro-finance. Technical experts in micro-finance need to see that there is more to the provision of micro-financial services than technical and managerial inputs to enhance performance and efficiency. Micro-finance organisations (MFOs) may be well managed financial organisations. but are they developmental? Indeed, if micro-finance is to achieve any developmental outcomes. the nature of these inputs must be shaped and guided by a clear understanding of the developmental outcomes sought.

The same applies to those who have apparently resolved " the tension between the demands of development on the one hand and of managing financial services on the other by com¬bining outreach with sustainability. With millions of poor people in developing countries still unbanked. there is clearly a need for the provision of micro-financial intermediation at a mass scale. and this can often only be achieved through sustainability. In this sense. the combination of outreach and sustainability is developmental. However. there is much more to development than the provision of financial services. Micro-financial services on their own are clearly not going to solve poverty. but can only serve as a complementary tool .within a broader strategy to reduce poverty.

Putting development back into micro-finance also presents challenges to the poverty school. Too often. debates on poverty and micro-finance have been limited to the number of clients reached. to income and the gendered control of re¬sources within the household, and to impacts on different categories of poor people, from the destitute to those just below the poverty line. The poorest people have been a particu¬lar focus of attention, even though many others also have valid and developmental financial needs.

A narrow focus on micro-financial services for poor people has therefore often hidden the range of development pur¬poses to which micro-finance as an Instrument can be used. As just two examples, we illustrate micro-finance practice that suggests the need to lend to the non-poor to generate wage-employment for poor people and that an exclusive focus on poor people may work against the develop¬ment of effective local democratic organizations.

Research on outreach and impact on poor people has also not contributed significantly to better product development (Rutherford. 2000: 109) or to strategies on how to combine micro-finance provision with developmental outcomes for poor people that go beyond access to financial intermediation.

Finally, putting development back into micro-finance pre¬sents a challenge to the growing number of critics of micro¬finance. Development is concerned, on the one hand, with ideology and processes that underlie current economic struc¬tures, and, on the other, with practical solutions to address either the immediate needs of poor people or to change the underlying structures. Ideological critiques are only helpful if they contribute to the process of finding such practical solutions.

This book explores practical initiatives to use micro-finance instrumentally to address a range of developmental needs. This is the key challenge for the micro-finance industry: to find how micro-finance as an instrument can be combined in' practice with appropriate developmental objectives to achieve positive change.

This challenge can only be met by organisations that seek to combine micro-financial services with clear development missions. Such organisations fall into a category that is some¬times referred to as 'development enterprises' and increasingly as 'social enterprises.

The organisation of micro-finance is therefore at the heart of this book, both in Part One and then in Part One from small local savings and credit groups to developing the whole micro-finance sector in India. The organisational challenges of combining often broadly conceived developmental goals with the technical delivery of micro-financial services are a key theme of the analysis. Organisational sustainability, in¬cluding sustaining a focus on development mission; is as challenging as achieving financial sustainability!

While the micro-finance industry generates many manuals on how to manage the technical delivery of micro-financial services, genuine analysis either of MFOs, which goes be¬yond managing a board of directors or staff, for example, or of development entrepreneurs who are by and large respon¬sible for founding and leading MFOs, remains very weak. This applies in particular to analysis that can help practitioners when they confront, often on a daily basis, the tension be¬tween their developmental objectives and the demands of micro- finance as a technical tool.

Fortunately, micro-finance practice in India has much to offer on these dilemmas. Indian practice is' extraordinary in its diversity, not least in terms of the development missions with which micro-finance is combined. As suggested above, these include poverty alleviation, livelihood promotion, de¬veloping the local economy, empowerment, building people's organisations, and changing wider systems and institutions within society.

India is also fast becoming one of the largest micro-finance markets in the world. especially with the growth of women's savings and credit groups (known in India as 'self-help groups' SHGs which are set to reach 17 million women by 2008 at the latest and which we explore in depth, and from a range of different perspectives, in this book.

In India, an exclusive focus on micro-credit for micro¬-enterprise is the exception rather than the norm. It is no surprise that Bhatt, India's micro-finance pioneer who founded the Self-employed Women's Association (SEWA) Bank in 1974, chaired a working group that produced a paper for the first Micro-credit Summit entitled 'Beyond micro-credit : Structures that increase the economic power of the poor and credit groups within poor communities work.

Indian practice of micro-finance has taught us not to see irreconcilable differences but to recognize the value of different perspectives and to seek to integrate them into a more coherent rather than compartmentalized whole. The point is not to decide. for example, between pursuing financial sus¬tainability or developmental impact. Between offering credit or savings and insurance. Between addressing poverty or building democratic organisations. All of these may be needed in a given developmental context or a given community.

The point is to recognise and understand the complexity of the developmental challenges within that context or com¬munity. To see how a range of appropriate strategies can be combined in practice to meet those challenges. And how the tensions likely to arise within an organisation (or organisations) embracing different strategies may be managed effectively. This is more in tune with the complex daily realities poor people face. and with the complex daily reali¬ties of most micro-finance practitioners we know.

Beyond micro-credit The link between micro-credit and poverty reduction has not been proven. Among the range of possible micro-financial services. micro-credit has predominated. on the assumption that it will deliver higher incomes and increased assets to the poor through micro-enterprise. Far less attention has been paid to the need to reduce risk. perhaps the most press¬ing need especially for the poorest households. Indeed, in¬jecting capital into existing micro-enterprises. or creating new ones. may enhance the risk that their poor owners face. There is indeed evidence that. as a result. a proportion of micro¬-credit clients have become worse off after accessing micro¬-loans (Hulme and Mosley, 1996). The need to reduce risk is why many poor people would prefer regular wage labour than managing their own micro-enterprise. if only such opportu¬nities were available (Mahajan. 1997).

Micro-credit providers cannot of course take their poor borrowers for a ride. While most providers emphasise invest¬ments 'of working or fixed capital in micro-enterprises. The reality is that many clients use the credit for consumption smoothing especially as most funds are fungible within a household. Such consumption-smoothing can allow house¬ holds to cope more effectively. but it also runs the risk of pushing them further into debt if they cannot repay the loan out of enhanced income streams. More appropriate financial products for this purpose are savings. insurance and loans to allow poor people to repay their high-interest loans to moneylenders and to meet emergency expenditure. And yet these have received far less attention than micro-credit for micro-enterprise. At the same time. while such products to enable consumption smoothing can stabilise a poor house¬hold's condition, they cannot propel them out of poverty.

With such a strong focus on micro-credit for micro¬ enterprises. it is perhaps surprising that less attention has also been paid to linking poor people to growing market op¬portunities and to enhancing the control they can exercise over their economic environment. Enterprise promotion was a focus of development activity until the early 1990s. Many involved in those endeavours feel that the growth of minimalist micro-credit has diverted attention from the on-going challenges of creating or strength¬ening enterprise. An important conclusion of initiatives to promote enterprises had in fact been that finance is often not the ruling constraint. and yet thinking and practice on the wider needs of enterprises has progressed little since the early 1990s. It is gradually resurfacing under the name of 'business development services'.

Another important conclusion was that assisting indi¬vidual enterprises was often not effective. whether through minimalist micro-credit or wider business services. A more systematic approach, often encompassing a sub-sectoral fo¬cus. was needed to impact a wider range of enterprises or local or regional economies as a whole (Dichter and Mahajan. 1990 : USAID. 1987).

(Bhatt. 1996). Indian practice. therefore, makes much clearer the diversity of potential developmental agendas for8micro¬finance. that go well beyond a financial tool.

At the same time. most Indian practitioners have always worked on the assumption that developmental objectives need to be combined with financial sustainability. Take the example of SEWA Bank again. the oldest MFO in india. The bank has been sustainable throughout its history. because it is based on savings. while its mission is clearly focused on the empowerment of women slum-dwellers.

The Cooperative Development Foundation (CDF) provides another example of integrating some of the polarities and tensions we have drawn attention to. Its primary purpose is to promote cooperatives as local democratic organisations and it has discovered that micro-financial services are a par¬ticularly good activity around which to organise cooperatives, In this way micro-financial services have been used a~ an instrument for democratic organisation. At the same time CDF is passionate about the smallest technical detail for "co¬operatives to manage micro-financial services. Without effective management by local people there can be little empowerment.

India therefore has much to offer, not only in term of current international debates on micro-finance. but also in terms of combining micro-finance with development. and how organisations can achieve this in practice. In the process. for over 25 years Indian MFOs have developed a range of innovative products and services: insurance services; link¬ing savings and credit groups to banks: integrating micro¬finance into agendas for women's empowerment and local democratic organization : using moneylenders as intermedi¬aries to change market prices: etc. In spite of all this," Indian practice is little known beyond the circles of Indian practitio¬ners and those who have worked alongside them.

To those who are familiar with India, the diversity, flexibil¬ity and integration of its micro-finance practice will come as no surprise, and for three reasons. First, India itself is diverse as many continents. Second, its integrationist cul¬ture has often led practitioners. from Gandhi to humble vil¬lage workers. to integrate new ideas and methods and make them their own. rather than see them is irreconcilable po¬larities. Third, India remains the largest democracy in the world, and democratic issues have bee at the heart of many developmental initiatives, including micro-finance.

At the same time. India has a long tradition of attention to entrepreneurial and organizational development. Indeed. India has been a major home of the growth of these profes¬sional disciplines. This makes it appropriate that this book reviews some of the organisational challenges that face MFOs. from an organisational development perspective rather than from a technical perspective that sees them purely as func¬tional financial intermediaries.

This book in fact arises out of a four-year organisational development project. managed by the New Economics Foun¬dation (NEF) in London. for four major MFOs in India (see the Appendix). It would be presumptuous to suggest that either the project or this book have provided simple guidelines to manage these organisational challenges. but at least they place them at the heart of practice rather than burying them under a heap of technical manuals.

The project also provided the insights that underpin the analysis in this book. an encompassing and integrating analy¬sis that ranges from the diverse developmental motives of development entrepreneurs to hard analysis of costs in pro¬moting micro-financial services at the community level: from ',detailed attention to the dynamics of individual savings and credit groups to developing the whole micro-finance sector to meet the challenge of scale that India always presents: from the need to achieve financial sustainability in order to serve and empower poor people to a diverse range of potential im¬pacts that micro-finance can have on them. for example in terms of their security and democratic voice. In many chapters in this book we challenge a narrow focus on the technical 'solutions' that micro-finance seems to offer. At the same time we challenge weak performance by taking a hard look at sustainability and impact issues (Chap¬ter 10). We challenge the dominant understanding of effi¬ciency as a highly unsophisticated measure (Chapter 8). We also challenge some of the ideals of local democratic organi¬sation by looking at the hard realities of how small savings In terms of greater control within the economic environ¬ment. the ownership of assets in particular can significantly reduce risk to households in the face of fluctuating incomes or expenditure demands. However. as individual micro-¬entrepreneurs. most micro-credit clients remain as vulner¬able to economic circumstances as they were before taking any micro-loans. Economic development is therefore as much about empowerment. of individuals and groups. as about in¬ comes and individual assets. For many poor people the only route to empowerment is through collective endeavors that can overcome the severe limitations imposed by individual isolation. This immediately brings in issues of collective ownership, including of the organisation delivering micro-financial services. This is such a fundamental issue in a development context. where un¬equal access to and ownership of assets often underpins the unequal distribution of power, that it is surprising that de¬bate on the ownership and governance of MFOs has so often ignored it.

These are some of the issues that lead into the first part of this book (Chapters 3 to 6). Mter a short introduction to the Indian financial sector (Chapter 2). for those unfamiliar with the context of practice analysed in this book, we take the first step beyond micro-credit to embrace a range of micro¬ financial services (savings, credit and insurance) to provide social and economic security to poor people (Chapter 3). We illustrate this through the case of SEWA Bank, as well as other MFOs innovating micro-financial products. from sav¬ings to credit for housing and education to insurance for women to cover a broad range of diseases. including gynecological disorders and occupational health. and provide maternity benefits. and for farmers against crop failure.

In Chapter 4. we analyse the work of BASIX in promoting rural livelihoods. BASIX goes beyond minimalist micro-credit by integrating the provision of micro-credit with a wide range of technical assistance and support services, including in highly cost-effective ways. However. BASIX also seeks to go beyond such integration of financial and non-financial ser¬vices by developing them as instruments within wider strat¬egies for livelihood promotion, which also involve. for example, supporting small enterprises to generate wage employment. intervening in promising sub-sectors and engaging a range of relevant market actors. and reviving moribund rural in¬frastructure and organisations.

We go beyond micro-credit to look at the democratic functioning of groups providing micro-financial services. We go beyond the concept of 'social intermediation' as a process to prepare potential clients to access micro-financial services and turn the argument on its head. Micro-financial services are a tool or instrument around which to build social capital through democratic people's groups and organisa¬tions. We illustrate this through the savings and credit oper¬ations of SHGs. and through detailed analysis of savings and credit cooperatives promoted by CDF.

With its focus on democratic organisations, this chapter tackles the issue of who owns the assets and profits that arise from the provision of micro-financial services. The analysis therefore takes us beyond the efficient delivery of micro-¬financial services to embrace issues of accountability, own¬ership and control.

In exploring women's empowerment through micro¬finance, we also go beyond an exclusive focus on poor people to recognise the broader (village) community and its demo¬ cratic organisations. We also go beyond the traditional focus on who controls loans within the household to look at oppor¬tunities for women emerging out of savings and credit groups to egage in informal and formal democratic processes. Finally. in Part One, we look at how MFOs have sought to bring about wider system-level or institutional change taking us beyond a focus on individual MFOs to their role in wider systems. We briefly review the impacts that micro¬finance can have on the local economy as a whole. beyond financial services or individual clients. We look in detail at the practical strategies of BAS IX and the Indian association of MFOs, Sa-Dhan. in influencing the policy and regulatory environment for micro-finance; at the integration of micro-fmancial services within the trade union SEWA's broad strategy to promote the recognition and rights of ~r self-employed women: and at CDF in changing the legal environment for cooperatives throughout India. for which CDF is putting its savings and credit cooperatives to good instrumental use.

It is in Chapter 6. as well as Chapter 8. that we introduce the only technical language in this book. drawing on eco¬nomic theory to distinguish carefully between institutions and organisations. Institutions are not formal organisations of some significance.

But the rules of the game that shape human interaction by providing the structure for transac¬tions and incentives. Because of this distinction we refer throughout this book to micro-finance organisations rather than micro-finance institutions (MFIs). Few MFOs could claim to be institutions even as commonly understood as formal organisations of some significance beyond their immediate operations. although Chapter 6 shows how those who aspire to such a role strive to do so in practice.

Part Two of the book then focuses in greater depth on the organisational and institutional issues confronting micro-finance. The first three chapters analyse SHGs in detail.

Chapter 7 comp1l.res Grameen Bank groups with the SHGs emerging in large numbers in India, contrasting the greater 'regimentation' of Grameen-style operations to the more au¬tonomous and democratic groups in India. placing each within their institutional context and investigating how tl:1e differ¬ences may influence costs. sustainability and empowerment outcomes. This chapter makes a significant contribution in analysing the diversity in group mechanisms in practice that are often lumped together as one micro-finance tool.

Chapter 8 looks at SHGs operating in urban slums. which takes us beyond the traditional reliance on community and kinship ties. which are often regarded as critical to any group mechanisms. to see how groups fare when such ties may not exist. The chapter places SHGs within the context of other financial services available to slum-dwellers, and shows how fragile groups can be.

Above all this chapter challenges a prevalent but simplis¬tic approach that assumes costs simply reflect organisational efficiency. demonstrating that many factors contribute to the costs of promoting SHGs. only some of which are under the control of the promoting organisation. These different costs have to be recognised if more efficient and appropriate micro-finance practice is to develop.

The analysis also challenges negative attitudes towards NGO ideology. which often regard such ideology as incom¬patible with the efficient delivery of micro-financial services. to show how it can in fact enhance efficiency by significantly reducing transaction costs.

Chapter 9, on the other hand. goes beyond the use of groups as channels for financial services to analyse the de¬velopment stages of SHGs. their tasks and processes. and in particular. leadership and social entrepreneurship within them. Like Chapter 8. this chapter demonstrates the wide variations in performance of SHGs. even when promoted by the same organisation. This is perhaps inevitable given that SHGs are autonomous organisations which determine their own policies and processes within widely different contexts. For such groups. leadership is clearly vital. and the chapter explores entrepreneurial traits and qualities among women leaders. and the costs and rewards of such leadership.

In Chapter 10. we then go beyond financial sustainability and outreach. first by incorporating organisational as well as financial parameters into a sophisticated rating mecha¬nism for micro-finance. and second. by looking at evidence of "wider developmental impacts. as well as reviewing evolving methods in India for measuring such impact.

Thus this chap¬ter both takes a hard look at the financial and organisational performance of micro-finance. and pays detailed attention to developmenta1 outcomes.

Drawing on all this analysis. we shift focus in Chapter 11 to the sectoral level. looking at measures that are needed to promote the micro-finance sector in India to address the vast demand for micro-financial services at an appropriate scale. For this, all the different stakeholders in the sector have to play clear and distinctive roles.

To conclude. Chapter 12 first draws out five emerging les¬sons and challenges. on micro-financial services as an in¬strument of development; on the adaptation of those services to their context: on the distinct role of NGOs: on dealing with systems; and especially on how the fast emerging movement of savings and credit groups in India urgently requires system – wide attention finally this chapter draws on the insights developed in the book to take up five additional challenges of capacity building, a topic that has often failed to attract sufficient reflective analysis and provides a frame work for capacity at the heart of micro finance practice. This book is titled 'Beyond micro-credit'. We are often blinded by the overwhelming policy support, in India and internation¬ally, for 'directed credit' or micro-credit to poor people which simplistically assumes that, with an infusion of capital, poor households will be able to break out of the vicious cycle of poverty.

In reality, poor people need access to so many more finan¬cial services than just micro-credit, including a range of micro¬-savings and insurance products. Indeed, the first step for poor people on the path out of the poverty cycle is social and economic security. Appropriate savings and insurance, as well as loans for emergency expenditures or basic assets such as housing and education, can contribute significantly to such security, not least among poorer and more vulnerable households.

These services can protect poor people from the impact of unforeseen crises and emergencies in their households or micro-businesses, from falling yet further into debt, and en¬able poor households to plan and manage their limited re¬sources more effectively to meet their basic needs (Johnson and Rogaly, 1997). Once poor households enjoy greater secu¬rity, they may be able to access promotional micro-finance prod¬ucts that help them develop their livelihoods

Rutherford (2000) has further demonstrated that. Espe¬cially for the protective needs of poor households. there may be little difference between savings, loans and insurance : try to avoid sterile arguments about whether the poor need 'savings' or 'loans' It is much more helpful to think creatively about ways of collecting small sums (be they savings or repayments or insurance premiums) and then of ways of turning them into large sums (be they. loans, or withdrawals from savings, or insurance pay-outs). The poor do not have a 'natural' preference for savings over loans, or vice versa-they have a need to turn small pay-ins into large take-outs. They will use the version of the three basic swaps (savings, loans or insurance) which happens to be on offer, and if all three are on offer they will take whichever is most convenient for them at that moment for that particular need (ibid.: 110).

Rutherford (2000: 4) rightly argues that poor households need relatively large sums of money for life-cycle needs (such as marriages, festivals and old age). emergencies (such as ill¬ness, the death of a bread-winner and floods) and invest¬ment opportunities (as much in assets and household goods, for example, as in investments in micro-businesses).

Poor households therefore need access to a basket of fi¬nancial services. When looking at financial markets for poor people, we discover not only the lack of credit, but also that other financial services are unavailable.

This chapter focuses on the financial services offered by a range of micro-finance organisations (MFOs) to address the needs of poor households for social and economic security. A look at the basket of services offered by several MFOs fea¬tured in this chapter demonstrates that it is indeed desir¬able to offer a range of financial services that not only take care of the investment needs of poor households, but also address their needs for security.

We look in particular at savings, which are essentially a model of self-insurance, and explicit insurance products, as well as loans, and how these different products can be inte¬grated into a comprehensive range of services to meet the needs of poor households. We feature most extensively the work of the Self-employed Women's Association (SEWA) Bank the oldest MFO in India founded back in 1974, as well as look at emerging innovations in product design by more recent MFOs.) References: 1.	Beyond Micro credit : vistar publications, New Delhi 2002 V.Pugazhendi – Dept. of Economic Analysis and Research. 2.	NABARD – 1999, report of the task force on supportive policy and regulatory framework for micro finance – Mumbai. 3.	Tara Nair – 2001 institutionalising micro finance in India, Economic and political weekly – Vol: 36 No;4, January 27. 4.	Naila Kabeer “Safety nets and opportunity ladders” 5.	Morduch and Sharma 2001 “Strengthening Public safety nets”.

THEORETICAL SCHOOL OF THOUGHT

The success of microfinance lies in improving the livelihoods and living standards of the poor in a sustainable way. The keywords in the financial sector today are therefore poverty alleviation, empowerment and sustainability. Keeping these in mind, analysis of the available literature shares that theoretically, there are different approaches and schools of thought. These are the financial systems, poverty lending and livelihood finance schools. However, in view of the fact that most of the prevalent practices tend to bypass certain important .ingredients contributing towards sustainable development, I have added a 'fourth school of thought' christened as the 'holistic' approach. To understand its underlying principles, each school has been presented with its strengths and inherent weaknesses.

The Financial System School of Thought

The financial system school of thought is also known as the minimalist approach. According to this school, viability and sustainability of the institution is much dependent on delivering the financial product efficiently and effectively. It sees institutional self-sufficiency as the only way to meet the widespread demand of clients for convenient. Suitable financial services delivery. It assumes that there is a 'simple missing piece' for poverty reduction and growth of enterprises, which is access to capital: Followers of this school or practitioners identify themselves as a bank. Their area of specializations. financial management and accounts. Their main aim is to bank the poor customers in both rural and urban areas. They are strong in MIS, Human Resource Management (HRM). and information and communication technology that helps in reducing their cost of operation and are able to manage a large number of clients. "The key to sustainability in microfinance is to charge an interest rate that is high enough to cover. Interest and adjustment expense, loan losses and operating costs". However, "MFIs must operate efficiently enough that reasonable, affordable and competitive interest rates can be charged to cover these costs" (David Hulme and Paul Mosley, 2005) to enable them to be viable and sustainable. .

This School of thought discourages subsidy, as this would not make them sustainable. Their argument is that they not only bridge the gap that exists among the 'Poor and non-poor in terms of making financial services available, but also provides small but ' reliable services that enable the poor to meet their emergency needs. Implicit in their position is the assumption that such provision of credit in and out of itself through judicious use by borrowers will lead to the desire outcome of improved incomes (Handout material of LLG, September 3. 2005). Example of organization following this school of thought could be-Grameen Bank (Bangladesh). etc.

The following are the strengths of the financial system school of thought : 	MFIs that practice this thought are specialized and their main focus is the delivery of 	financial products such as credit savings and insurance including remitter’s/money transfer to the poor who are otherwise thought to be un-bankable by formal financial institutions. 	Specialization in financial services leads to increase in efficiency of operations and diversity of products. Also, lesser resources are spent on staff capacity-building.

	The cost on capacity-building is one-dimensional as it (MFIs) trains staff in enhancing their skills repeatedly by practicing and doing the same kind of work. The approach has a potential for greater outreach and a chance of upscaling and is mostly viable and sustainable from the point of view of the MFI.

	The products and services are amenable to pricing; hence borrowers are likely to' pay without questioning. It is possible to design a revenue model for a product that would enable sustainability.

	The MFI can easily attract and access the capital market. It acts as a bank, which leads to easy identification by borrowers. This contributes and enhances better internalization within the' organization and clients.

The weaknesses of the financial system school of thought are:

	It does not provide for or build the capacity of the customer /poor clients. It is doubtful' if loans are repaid well. 	It only promotes finance from the point of view of the financiers in delivery of the services, without taking into account that of clients. This ignores the human aspects.

	All activities and services lack the views of the poor. MFIs, which can scale up and achieve greater outreach for a few years, but beyond this, it becomes difficult to the provision of services, more so that of bringing about sustainable poverty reduction.

	It is a number-oriented and lacks the deeper understanding or feel of the social fabric.

	It is also presumed that the staff of MFIs are technically qualified and are tuned into human and social relationships. On the contrary, most MFIs, staff are not suitably qualified and lack social and empathetic skills.

POVERTY LENDING SCHOOL OF THOUGHT

This school of thought is also known as the integrated approach or institutional and welfarist approach (Woller et al., 2000). It contends that "Although financial sustainability may be desirable it is not a goal in and itself: The goal is poverty alleviation. "Murdoch refers. to this as "Schism between rhetoric and action and between financially-minded donors and socially-minded programs" (Murdoch, 2000 p. 618). They provide both financial and social services. The choice of emphasis on either one depends "on its objective and the circumstances (demand and supply) in which an MFI operates".

Practitioners who follow this approach provide financial services at a subsidized rate, I typically at below market interest rates often along with complementary services such as imparting training and skills, education, health, nutrition and other basic needs. They view microfinance as a tool for development and poverty alleviation. These ideas are found in the works of SEW A (Self Employed Women's Association), Dhan Foundation, etc. The goal of the practitioners is usually to promote people's institutions encompassing a range of development activities.

For example, SEW A started with promotion of welfare activities for trade unions and started a cooperative bank, owned and managed by women. Later, it undertook other developmental activities.

Today .SEW A provides ~ range of savings, loans and insurance products and other services such as productivity loans, emergency loans, housing and infrastructure loans, integrated work security schemes on a contributory basis (providing life insurance, works security, insurance and maternity benefits), varieties of savings products such as daily collection scheme etc., comprehensive insurance products covering natural and accidental death, health and asset loss, personal financial counseling, business counseling! advice/education and training in how to avail of and operate financial services effectively.

SEWA’s integrated approach is based on its long experience. The rationale for this approach is that, if adverse conditions affecting the quality of life are to be tackled by addressing poverty, it needs to employ multiple strategies. Therefore, it takes up a whole range of activities, especially those that affect women's lives, and are more productive and security enhancing. Under this approach, SEW A includes livelihood promotion, financial services, 'healthcare, insurance, childcare and housing.

SEWA promotes and nurtures women's economic organizations such as' artisans cooperatives; service cooperatives; land-based producer's cooperatives milk cooperatives; vendors' cooperatives; savings and credit cooperatives. Besides, it facilitates marketing of members' products. Through such organizations, the members roles expand from being just producers to becoming owners and managers. This leads to an increase in their bargaining power and creates new linkages with. markets. It also helps workers build their capacity as individuals and groups. SEW A work with different categories of workers. They are: 	Home-based workers (weavers, potters, bidi rollers, incense stick rollers, dry' food. makers, tailors, agricultural products processors and handicraft artisans). 	Vendors, traders and hawkers who deal with perishable and non-perishable goods. 	Labor and service providers such as agricultural laborers, construction site workers, handcart pullers, head loaders, washer-women, cooks etc. 	Small producers like women who invest their labor and capital to carry out their businesses. (Gum collectors, salt workers, seamstresses, cattle rearers etc.,). Similarly, Dhan foundation views microfinance as more than a mere financial service. It promotes activities like housing, infrastructure, health, education, sanitation, drinking water, skill building and business promotion. Dhan Foundation facilitates the establishment of libraries, collaborates with business houses for providing employment. and facilitates urban-rural linkages. It also facilitates philanthropy for supporting education pf children through scholarships and donations to members and their families affected by man-made and natural calamities. The federations or people's institutions promoted by the Dhan foundation have also established linkages. with local and district administrations, municipalities, apex banks, CAPART, HDFC, 8IDBI, NABARD and industrial houses.For a better understanding, the following elaborates on the strengths of the integrated approach: 	This approach combines both the financial and social aspects. It takes into consideration that the poor suffer from the lack of sustainability features such as capacity, skill, assets, knowledge, information, networks and other resources. 	It allows for more outreach, because the packages include not only financial services but also other relevant social services.