Assignment 1

Research Report
On
Impact of Microfinance

Submitted To: - Submitted By: -

Manu Kalia Bikash Kumar Sah

Roll no: - A27
Section: - S1003
Registration no: - 11007057

Subject: - Research Methodology

Date of Submission: - 28th Jan 2011
 Introduction

Microfinance

Microfinance means as name suggest it implies small level of finance to poor or lower people
to fulfil their demand and need because poor or lower don’t go bank for taking loan because
they want very small amount to do something like if poor people want to purchase rikaswa
then the cost of it 2000 or 3000 then he doesn’t go bank for taking loan on 3000, that’s why
microfinance come to help that level of people. Microfinance finance minimum 500 to
maximum 100000 rupees and their aim isn’t profit maximization. They give credit to lower
level people. The terms microcredit and microfinance are often used interchangeably, but it is
Important to highlight the difference between them because both terms are often confused.
Sinha (1998,) states “microcredit refers to small loans, whereas microfinance is appropriate
where NGOs and MFI supplement the loans with other financial services (savings, insurance,
etc)”. Therefore microcredit is a component of microfinance in that it involves providing
credit to the poor, but microfinance also involves additional non-credit financial services such
as savings, insurance, pensions and payment services.

The main objective of microfinance is to develop the poor people economy and develop rural
area because development of rural area helps any country to develop or growth very rapidly.
Pioneer of microfinance is Muhammad Yunus.

Microfinance and Social Interventions

There are currently a few social interventions that have been combined with micro financing
to increase awareness of HIV/AIDS. Such interventions like the “Intervention with
microfinance for AIDS and Gender equity” which incorporates microfinancing with “the
sister-for-life” program a participatory program that educates on different gender roles,
gender-based violence, and HIV/AIDS infections to strengthen the communication skills and
leadership of women "The Sisters-for-Life" program has two phases where phase one
consists of ten one-hour training programs with a facilitator with phase two consisting of
identifying a leader amongst the group, train them further, and allow them to implement an
Action Plan to their respective centres.
Microfinance has also been combined with business education and with other packages of
health interventions. A project undertaken in Peru by innovations for poverty action found
that those borrowers randomly selected to receive financial training as part of their borrowing
group meetings had higher profits, although there was not a reduction in "the proportion who
reported having problems in their business".

There are many criticism of microfinance some of are: -

1. High interest rates charged to borrowers.
2. Illusion of poverty reduction.
3. Microfinance has been a development policy of quite historic propotions
4. Other criticsm was raised by the IPO of a Mexican MFI Banco Compartamos in 2007. As the
company put its shares on Mexican stock exchange it was able to generate very high profits
that were achieved by rising interest rates on their micro-loans that at some point reached
86% per year. In july 2010 india’s biggest MFI, SKS Microfinance also went public.

Types of Microfinance used by poor people

Objective of the study: -
The main purpose behind this research is to understand
1. To understand How microfinance work and does it beneficial for poor level people or
not.
2. The role of microfinance in society.
3. To know how Microfinance provide access fund in society.
4. To know what are the problems facing by microfinance and try to solve it.
5. To know does is associated with improvements in household economic welfare.
6. To know does it help to empower women by supporting women’s economic
participation and so promotes gender equity.
7. To know how RBI helps microfinance.
8. To know people really like taking loan from microfinance or not.
9. To know how it encourage entrepreneurship and self-sufficiency.
10. To know how to manage risk.
 Review of Literature
Effects of Financial Access on Savings by Low-Income People
Aportelo Fernando, Bank of Mexico
December 1999

This report is about the impact of increasing access on low-income people savings. Effects on
households’ saving rates and on different informal savings instruments are considered. The
paper uses an exogenous expansion of a Mexican savings institute, targeted to low-income
people, as a natural experiment and the 1992 and 1994 National Surveys of Income and
Expenditures. Results show that the expansion increased the average saving rate of affected
households by more than 3 to almost 5 percentage points. The effect was even higher for the
poorest households in the sample: their saving rate increased by more than 7 % points in
some cases. Furthermore, the expansion, in general, had no effect on high income
households. In the case of informal savings instruments, evidence of crowding out of these
instruments caused by the expansion is limited. Results do not rule out the possibility that a
considerable fraction of the increase in households’ savings could have come from new
savings.

This study shows that people of Indonesian willing and able to save if microfinance
experience given attractive instruments. This study also shows that low-income people save
because of emergencies and unexpected investment opportunities, also shows that they are
more interesting or preference for liquid accounts. This study done by focusing on explicitly
poor people. According to Pahnal (Patronato del Ahorro Nacional) there is change in saving
opportunities and offered two new simple and easy-to-understand financial instrument. The
first one is a fixed term instrument called Tandahorro. It has compulsory monthly deposits of
at least 50 pesos (a little more than five dollars at the end of November 1999). Its balances
may not be withdrawn until maturity. There are three maturity terms: 12, 24 and 36 months.

Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment
Burguess Robin & Pande Rohini; LSE, Yale University
August 2003
Lack of access to finance is often cited as a key reason why poor people remain poor. This
paper uses data on the Indian rural branch expansion program to provide empirial evidence
on this issue. Between 1977 and 1990, the Indian Central Bank mandated that a commercial
bank can open a branch in a location with one or more bank branches only if it opens four in
locations with no bank branches. They show that between 1977 and 1990 this rule caused
banks to open relatively more rural branches in Indian states with lower initial financial
development. The reverse is true outside this period. They exploit this fact to identify the
impact of opening a rural bank on poverty and output. Their estimates suggest that the Indian
rural branch expansion program significantly lowered rural poverty, and increased non-
agricultural output.

McGregor et al. (2000,) states that wider social and economic impacts can occur through the
labour market, the capital market, the market for goods consumed by poor people, through
production linkages and through clients participation in social and political processes.

Zohir and Matin (2004,) make a similar point when they state that the impact of
microfinance interventions is being under-estimated by “conventional impact studies which
do not take into account the possible positive externalities on spheres beyond households”.
They propose that impact should be examined from cultural, economic, social and political
domains at individual, enterprise and household levels (2004).

Chowdhury, Mosley and Simanowitz (2004) argue that if microfinance is to fulfil its social
objectives of bringing financial services to the poor it is important to know the extent to
which its wider impacts contribute to poverty reduction. In the following sections I will
examine the findings from wider assessments of microfinance interventions at a household
and community level, to show what learning can be gained when impact assessments have a
broad scope of analysis.

Tying Odysseus to the mast:Evidence from a commitment savings product in the

Philippines
Ashraf Nava, Dean Karlan, Yin Wesley
July 2005

They designed a commitment savings product for a Philippine bank and implemented it using
a randomized control methodology. The savings product was intended for individuals who
want to commit now to restrict access to their savings, and who were sophisticated enough to
engage in such a mechanism. They conducted a baseline survey on 1777 existing or former
clients of a bank. One month later, They offered the commitment product to a randomly
chosen subset of 710 clients; 202 (28.4 percent) accepted the offer and opened the account. In
the baseline survey, They asked hypothetical time discounting questions. Women who
exhibited a lower discount rate for future relative to current tradeoffs, and hence potentially
have a preference for commitment, were indeed significantly more likely to open the
commitment savings account. After twelve months, average savings balances increased by 81
percentage points for those clients assigned to the treatment group relative to those assigned
to the control group. They conclude that the savings response represents a lasting change in
savings, and not merely a short-term response to a new product.
The economic lives of the poor
Banerjee Abhijit V. and Duflo Esther;
Abdul Latif Jameel Poverty Action Lab, MIT
October 2006

This paper uses survey data from 13 countries to document the economic lives of the poor
(those living on less than $2 dollar per day per capita at purchasing power parity ) or the
extremely poor (those living on less than $1 dollar per day). They describe their patterns of
consumption and income generation as well as their access to markets and publicly provided
infrastructure. The paper concludes with a discussion of some apparent anomalous choices.

The Impacts of savings

Dean Karlan
Financial Access Initiative
January 2008

A summary of literature on the impact of micro insurance, and observation is that poor
households do have discretionary spending next observation financial institutions appear to
have ways to stimulate higher savings and Third, there remains a huge gap between the cost
of debt and the return on savings—and thus big potential impacts to saving. Individuals who
“save up” sufficiently can “earn” the interest not paid on debt. He found that One of the
biggest challenges to measuring the impact of savings programs is that savings are not easy to
capture in household surveys. Four issues in particular contribute to this difficulty: size,
timing, diffusion, and confounding of other services.
Female Empowerment: Impact of a Commitment savings product in the Phillippines
Ashraf Nava, Dean Karlan, Yin Wesley;
HBS and Jameel Poverty Action Lab, Yale, University of Chicago
March 2008

Female “empowerment” has increasingly become a policy goal, both as an end to itself and as
a means to achieving other development goals. Microfinance in particular has often been
argued, but not without controversy, to be a tool for empowering women. Here, using a
randomized controlled trial, They examine whether access to and marketing of an
individually-held commitment savings product leads to an increase in female decision-
making power within the household. They find positive impacts, particularly for women who
have below median decision-making power in the baseline, and They find this leads to a shift
towards female-oriented durables goods purchased in the household.

Saving Constraints and Microenterprise development: Evidence from a field

experiment in Kenya
Dupas Pascaline and Robinson Jonathan;
UCLA, UCSC, NBER
March 2009

They conducted a field experiment to test whether savings constraints prevent the self-
employed from increasing the size of their businesses. They opened interest-free savings
accounts in a village bank in rural Kenya for a randomly selected sample of poor daily
income earners. Despite the fact that the bank charged substantial withdrawal fees, take-up
and usage was high among women and the savings accounts had substantial, positive impacts
on their productive investment levels and expenditures. These results imply that a substantial
fraction of daily income earners face important savings constraints and have a demand for
formal saving devices (even for those that offer negative de facto interest rates).
Expanding Microenterprise credit access: using rendomized supply decision to estimate
the impacts in manila

Dean Karlan, Jonathan Zinman;

Yale University, Darthmouth College, IPA, Financial Access Initiative, MIT Jameel Poverty
Action Lab
July 2009

Microcredit seeks to promote business growth and improve well-being by expanding access
to credit. They use a field experiment and follow-up survey to measure impacts of a credit
expansion for microentrepreneurs in Manila. The effects are diffuse, heterogeneous, and
surprising. Although there is some evidence that profits increase, the  mechanism seems to be
that businesses shrink by shedding unproductive workers. Overall, borrowing households
substitute away from labor (in both family and outside businesses), and into education. They
also find substitution away from formal insurance, along with increases in access to informal
risksharing mechanisms. Our treatment effects are stronger for groups that are not typically
targeted by microlenders: male and higher-income entrepreneurs. In all, our results suggest
that microcredit works broadly through risk management and investment at the household
level, rather than directly through the targeted businesses.

The miracle of microfinance? Evidence from a randomized evaluation

Banerjee Abhijit, Duflo Esther, Glennerster Rachel, Kinnan Cynthia;
MIT Jameel Poverty Action Lab, Indian Centre for Micro Finance, Spandana
October 2009
Hyderabad, India

The researchers from the Abdul Latif Jameel Poverty Action Lab (J-PAL) at MIT and the
Indian Centre for Micro Finance worked with Spandana to randomize the roll-out of its
microcredit operations in Hyderabad, India’s fifth-largest city. Spandana chose 104 areas of
the city to expand into eventually, rejecting some districts as having too many construction
workers, who come and go and might take Spandana’s money with them. In 2006–-07
Spandana started lending in a randomly chosen 52 of the 104. Researchers followed up by
surveying more than 6,000 households between August 2007 and April 2008, restricting their
visits to families that seemed more likely to borrow: ones that had lived in the area at least
three years and had at least one working-age woman. The surveyors made sure not to visit an
area until Spandana had been there at least a year. They surveyed in “treatment” areas (ones
where Spandana worked) and control ones (where it did not yet).

Nigeria: FG Supports Creation of Microfinance Development Fund

Emejo James

24 January 2011

President Goodluck Jonathan announced that Federal Government will back the Central Bank
of Nigeria (CBN) to ensure that a Microfinance Development Fund is established in the
country. And it announces in 5th Annual Microfinance Conference and Entrepreneurial
Award themed was, “Financial Inclusion for Accelerated Micro, Small and Medium
Enterprises Development: the Nigerian Perspective”. He said that this will help poor people
of Nigeria to develop their life and economy because 70% of people lie in BPO (Below
Poverty Line), and also told that all the financial institution along with Banks and state
government help CBN that it helps poor people. He identified challenges to financial
inclusion to include lack of awareness, low income, social exclusion, illiteracy, distance from
bank branch, difficulty in proving identity as well as high transaction costs among others.
Regulation in India's microfinance sector aims to address feckless borrowing and reckless lending –
but will the new restrictions entrench poverty, rather than end it?

Tripathi Salil
26 January 2011

This articles is about the microfinance that help poor people of their life and remove the
traditional system that borrow from moneylender which is very expensive for poor people
and they never return money and became more forever. In this articles, poor people who liven
in Rural area they borrow money from moneylender because they are far from reach of bank
for buying their basic need and even for organizing some event like marriage, this happen in
Andhra Pardesh so that Micro finance play important role that free from moneylender. But
lack of regulatory oversight, unbridled political cynicism and the myopic herd-like mentality
of the private sector combined to threaten to push India's poor in the arms of the
moneylenders again. Reserve Bank has made policy recommendations that can revive the
sector while protecting the borrowers. And the people of AP take loan from micro finance
institution and start doing their small business, fullfill their desire and make happy. The rate
microfinance institutions charged was stiff (24% to 30%) but it was lower than what the
moneylender would charge. The regulatory change suggested by the Reserve Bank are
positive, but the blunter changes the Andhra Pradesh government had initiated – with
borrowers required to obtain a certificate from self-help groups before taking fresh loans, and
moves forbidding weekly meetings between the borrower and the lender – seem designed to
protect the state's monopoly, with the corruption it entailed. This central intervention
regulates the industry, diminishes choice, and will limit poor people's access to finance, but it
will protect the vulnerable among them.

Microfinance: Development panacea, or exorbitant, ineffective poverty trap?

Microfinance schemes are under fire as a new law looks to regulate the sector in the Indian
state of Andhra Pradesh

Kommani Lalitha, a microfinance recipient, in Ranga Reddy District, in the outskirts of Hyderabad,
India. Photograph: Noah Seelam/AFP/Getty Images

By, Bunting Madeleine

22 December 2010

This article is about crisis has stock Andhra Prasadh, the hub of the country's multibillion
dollar microfinance sector because their people suicides because of heavy-handed debt
collection methods it’s all because of misusing and abusing the concept of micro finance
which is developed by Muhammad Yunus, a pioneer of microfinance. A number of senior
economic professors at US universities have joined the argument, writing the finance times to
defend the reputation of microfinance and criticising the government intervention and they
suggested that there should be some reform in this sector in interest rate because they change
20% interest which is quite high. Central to the crisis in Andhra Pradesh are institutions such
as SKS, which started out as an NGO and transformed itself into a profit-making company
that launched on the Mumbai stock exchange. In recent days, SKS's share price has halved as
confidence has been shaken.
There have been attempts in recent years to clarify the key principles of microfinance (of
which microcredit is one element). A central aim is that it aims to offer financial services,
such as savings and small loans, to the poor. Usually, the majority of borrowers are women.
Schemes are usually accompanied by strict rules on attendance, repayment and building
group trust. It also concludes that poor people take loan to cover health and education
expenses.
 Research Design
The study was descriptive in nature with survey method being used to complete the study
because this research is the most commonly used and the basic reason for carrying out
descriptive research is to identify the impact of microfinance in poor people and they really
feel satisfaction or not. Descriptive research is also called Statistical Research. The main goal
of this type of research is to describe the data and characteristics about what is being studied.
Here we are also going to find out the characteristics and impact of micro finance in poor
people. In this research they have looked at the need of the consumer of different age group
and also gender.
 Research Methodology
The methodology to conduct the study was composed of different tasks as follows:
1. Review of literature
2. Through internet
3. Magazine
4. Book
5. Different data analysis of MFI
6. Different field experiment test of poor people income.

With the help of this these methods the research done by different researcher and finding
from this study that microfinance helps people to increase their leaving and make them
feel happy, because of microfinance their all desire came true but their also some
drawback of this study. Microfinance doesn’t social organization because it charge huge
about of interest and here the process also very slow and some corruption also involve but
because of RBI, Central government and Mohammad Yusuf, he declare that the MFI who
charge higher than 15% then that company may pay some penalty.
 Reference

1. Cooper D.R., Business Research Methods, Tata McGraw Hill, New Delhi,2007
2. http://allafrica.com/stories/201101240467.html
3. http://www.planetd.org/2010/01/18/literature-review-impact-microfinance/
4. http://www.guardian.co.uk/global-development/poverty
matters/2011/jan/26/microfinance-regulations-india
5. http://www.guardian.co.uk/global-development/poverty-
matters/2010/dec/22/microfinance-india-sector-regulated
6. http://en.wikipedia.org/wiki/Microfinance#Ways_in_which_poor_people_manage_the
ir_money
7. http://preprodpapers.ssrn.com/sol3/papers.cfm?abstract_id=770387&rec=1&srcabs=912771
8. http://www.econ.ucla.edu/pdupas/SavingsConstraints.pdf
9. www.google.com
10. Vision – the journal of business perspective. Vol 13. No. 3 . July – September 2009