Dr.Muhammad Yunus has said multiple times that “All humans are born entrepreneurs”. The revolutionary idea of Grameen bank has brought millions of people, employed in small enterprises such as farming, out of poverty. Dr. Arun Kumar and Dr. Suresh Babu at IITMadras are trying to synthesise available evidence on the links between microfinance and poverty.
It was 1974 when Bangladesh was facing one of the worst famines in history. Ater quitting his job as a deputy chief of the General Economics division in the government’s planning commission, Dr. Muhammad Yunus was serving as the head of the economics department at Chittagong University for a little over a year then. It was during this period that the inspiration for Grameen Bank came to Dr. Muhammad Yunus in the form of a trip to the village of Jobra in Bangladesh.
What began by helping a woman struggling to make ends meet as a weaver of bamboo stools soon became a model to assist families avoid the high interest rates under predatory lending. While allotting small loans of $27 to a group of 42 families as start-up money, little did he realise that he was laying the foundation for the now familiar Grameen Bank and what would go on to be hailed as a ‘miracle cure’ for global poverty – microfinance. He went on to win the Nobel Peace Prize in 2006 for his eforts in creating one of the world’s most high-profile and generously funded development interventions.
“Microfinance to a layman is basically a community initiative to induce very small savings for the people by pooling their savings and lending within the group”, says Dr. Arun Kumar, a professor in the Department of Management Studies (DoMS). Dr. Arun Kumar, along with Dr. Suresh Babu from the Department of Humanities and Social Sciences, has spent a considerable amount of time in the past two years visiting rural villages across various states in India. The primary aim of microfinance is to help poor people having minimal experience in dealing with banks achieve a sustainable source of cash flow on a monthly basis. Aimed at people employed in small enterprises such as petty shops, tailoring and even farmers especially in rural areas, this concept has been a breakthrough in unlocking immense opportunities for them. “It has even gained traction in urban areas, and also involves a gender component”, informs Dr. Suresh Babu about the active participation of women and their role in self help groups.
The concept of microfinance is to find collaborative ways to meet the needs of a group, primarily through creating and exchanging cash within the group. Consider a group of 10 women, and let us say each of them contribute Rs. 100 towards pooling their savings in the group every month. This total amount of Rs. 1000 can be given as a loan to one of the members to conduct her business under the condition that in the second month while all the other members contribute Rs. 100 each, she repays an installment of her loan by contributing Rs. 100 with interest on top of her monthly contribution. In the second month, the group now has a little over Rs. 1100 which can be given as a loan to some other member in the group. By doing this on a rotating basis, the group continuously increase their savings and also keep a check on each other so that they do not fail to repay the amount.
This model has been a great success in combating the fact that a large part of the rural population is not a part of the formal financial system. By eliminating the middleman, borrowing from a money lender at high interest rates and being trapped in a vicious circle of debt for generations is no longer their only option. By being a part of this kind of a group an individual can manage to raise a sizeable amount as loan without collateral and at a reasonable rate of interest. The fact that the borrowers paid Muhammad Yunus back in full and on time spurred him to start travelling from village to village, offering more tiny loans and cutting out the middlemen.
Dr. Yunus was determined to prove that lending to the poor was not an ’impossible proposition’, and Grameen bank adopted its signature innovation: making borrowers take out loans in groups of five, with each borrower guaranteeing the others’ debts. Thus, in place of foreclosure (banks selling the property of the loanee to recover the debt they are owed) and a low credit rating that usually defines borrowing from a bank – Grameen depends on an incentive at least as powerful for poor villagers: the threat of being shamed before neighbors and relatives.
Dr. Arun Kumar and Dr. Suresh Babu have undertaken research on this financial system over the past year, in collaboration with the Department for International Development (DFID), UK and Hand-in-Hand, a non-governmental organisation (NGO) headquartered in UK. Hand-in-Hand was in fact started in Tamil Nadu by Dr. Kalpana Shankar, the wife of a district collector in Coimbatore with the help of Dr. Percy Barnevik, a Swedish business executive and philanthropist.
Interestingly, Dr. Kalpana earned her PhD in nuclear physics and had little training in finance and economic development. It is today present in over ten countries across the world including Afghanistan and Lesotho. Their mission is to work for the economic and social empowerment of the poorest and most marginalised population by supporting the development of businesses and jobs. They receive funding from a number of different sources including individuals, corporations, bilateral and multilateral institutions, and trusts and foundations. As of 2014, Hand-in-Hand India had created 1.3 million jobs, 3,093 Citizens’ Centres and covered over 3 million households under its various programmes.
“There were two factors that led to the both of us joining forces to work on this area”, says Dr. Suresh Babu. “He (Arun) works in finance while I am interested in development processes. Microfinance provided an overlap in terms of finance and development and we discovered that there is some potential research that can be conducted together in this area.” They had individually worked on previous assignments for Hand-in-Hand and decided to collaborate on research when a new assignment on microfinance was offered.
The terms of the project were to synthesise available evidence on the links between microfinance and poverty. “We were assessing if the investments into the NGO were yielding the results they were expected to and if there is a social return on those kinds of investments”, says Dr. Arun. The NGO assisted them with their field based research in visiting different villages from Pali in Rajasthan to Cuddalore in Tamil Nadu where they had a presence. They looked into various cases of self-help groups and communities which received support from the NGO to create a system of lending and borrowing among the community.
“We came across different scales of operation during our field visits. One of the most successful cases is ‘Kudumbashri’ in Kerala.” Afemale-oriented, community-based, poverty reduction project that was initiated by the Government of Kerala ‘Kudumbashri’ receives regular aid and assistance in conducting their activities and increasing their reach from the government. Their strategy is one of forming women’s collectives in different villages and provide skill upgradation and training sessions. Small savings generated at the families are pooled at various levels as thrift and used to attract credit from banks to support micro-enterprises for sustainable economic development. One of the key reasons for its success is cited as the ability of any woman to become involved with the organisation irrespective of whether she is below or above the poverty line. By conducting thorough background checks, the need
for a voter ID card or a valid identity proof becomes unnecessary and thus paves the path for the wide impact that Kudumbashri has managed to create. There have also been individual instances of success stories that have been detailed in the research.
While the ultimate goal of this system is to generate employment and sustain local entrepreneurial businesses, this may not always be the case. By visiting different villages across the geography of the country and covering a wide range of specific industries from the 68,000 villages where the NGO operates, they concluded that while the model leads to a tangible benefit for borrowers, there may be specific situations when the system may not work. For instance, money borrowed to pay tuition fees for children would lead to a case where the money borrowed does not have an immediate return on investment. This may lead to a situation where the model may break down as the resources pooled in by different members help only a few individuals while the rest would have to wait for a long time to see the amount be repaid. Both Dr. Arun and Dr. Suresh have spent a lot of time in analysing different types of SHGs and have compiled a report detailing the complete spectrum of the impact of microfinance in helping eradicate poverty in India.
Moving forward, the goal is to conduct research to understand more about the consumption of these loans by the people taking them. The aim of microcredit is, ater all, to teach the financially disadvantaged the basic financial principles they need to sustain the growth that is initiated by SHGs. While it’s not a one stop tool for the eradication of poverty, it is definitely an important precondition to economic development. In the words of Dr. Yunus, “All human beings are born entrepreneurs. Some get a chance to unleash that capacity. Some never got the chance, never knew that he or she has that capacity.”
Dr. Arun Kumar G is currently engaged as a professor in the Department of Management Studies, IIT Madras, and is involved in teaching Corporate Governance, Financial Accounting and Mergers & Acquisitions. His research interests lie primarily in Development Finance and Joint Ventures & Alliances. He has co-authored two textbooks on Management Accounting and can be reached at firstname.lastname@example.org
Ananth Sundararaman is a third year undergraduate student in the Department of Civil Engineering at IIT Madras. He is also pursuing a Minor in Economics. He spends his time between his hobby of quizzing and watching Liverpool play, come the weekend. A believer in the underlying philosophy of Asterix, his biggest fear is the sky falling on his head.
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