Effect and Effectiveness of Microfinance in the Presence of Political Environment: A Study of Microfinance Institutions of West Bengal, India

Effect and Effectiveness of Microfinance in the Presence of Political Environment: A Study of Microfinance Institutions of West Bengal, India

Saptarshi Chakraborty (Panchakot Mahavidyalaya, India)
DOI: 10.4018/978-1-5225-5213-0.ch016

Abstract

Microfinance is an integrating factor of the potentiality of the local poor masses to the formation of GDP. It is the deciding factor whether economic growth is supply leading or demand following. Confronting with adverse selection, moral hazard, and collateral issues, it is to be studied whether microfinance thrives when it is administered well. This chapter intends to examine a case study of success and viability of microfinance in some places of the state of West Bengal, India with special reference to change in the political regime. In this light, assets, deposit liabilities, loans, and advances of microfinance banks are used as proxy for the activities of microfinance institutions while repayment of priority sector loans is used as a proxy for viability of microfinance activities. Results show that microfinance is successful not when large amount of loans are given out but when loans are actually repaid successfully, which is ensured by good political environment in the remote area.
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Introduction

The history of microfinancing can be traced back as far as the middle of the 1800s, when the theorist Lysander Spooner was writing about the benefits of small credits to entrepreneurs and farmers as a way of getting the people out of poverty. Independently of Spooner, Friedrich Wilhelm Raiffeisen founded the first cooperative lending banks to support farmers in rural Germany.The modern use of the expression “microfinancing” has roots in the 1970s originated in Bangladesh with Muhammad Yunus and GrameenBank. Microfinance is providing financialservices to low income individuals who are excluded from the traditional banking system. Microcredit, an aspect of microfinance, uplifts individuals, families, andcommunities out of poverty by providing small amounts of startup capital for entrepreneurialprojects, that help them to generate income, build wealth, and move above poverty line.Unlike traditional financial system, microfinance believes in “jointliability concept,” where groups of individuals, usually women, club together to apply for loans, and hold joint accountability its repayment. With microcredit, poor households can move away fromsubsistence living, by investing more onnutrition, education, and living expenses.

Microfinance emerged from a concern about the poor but it is difficult to give microfinance an accurate theoretical definition. The difficulty of definition is not only because there are too many types, modes and exceptions in practice, but also because the different stakeholders’ attitudes towards microfinance. With changing effects and impacts, the definition of microfinance has changed and varied much in past decades. According to Morduch (1999), “Microfinance refers to provision of financial services, loans, savings, insurance, or transfer services to low-income households.” Sometimes microfinance is referred to as “Microcredit, which is the extension of small amounts of collateral- free institutional loans to jointly liable poor group members for their self-employment and income generation, is a Grameen Bank innovation” (CGAP, 2003). The difficulty of definition is also because it is not feasible to define what size loan is small, and some original characteristics, such as ‘collateral- free’, or ‘jointly liable poor group members’, have not always applied in practice. However, microfinance projects all over the world orient around the following aspects:

  • 1.

    Microfinance targets the poor but it is difficult to say whether they aim at economic profits or social effect and whether such objective is viable.

  • 2.

    Microfinance providessmall loans that are usually rejected by the formal commercial banking system as the poor often cannot meet the requirements of the formal banking sector.

  • 3.

    Microfinance usually deals with microcredit which refers to small loans, but nowadays, it has replaced it with a wider coverage, along with the understanding that “Financial services needed by the poor include working capital loans, consumer credit, savings, pensions, insurance, and money transfer services”(CGAP, 2003)

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Effectiveness

Microfinance often had been seen to provide lowcost financial services to poor individuals and families (Miller & Martinez, 2006; Stephens & Tazi, 2006). Microfinance programs also help in the development and growth of the local economy as individuals and families are able to move past subsistence living and increase disposable income levels. In many studies it was shown that microfinance programs were able to reduce poverty through increasing individual and household income levels, as well as improving healthcare, nutrition, education, and helping to empower women that has been mentioned in the studies like Pitt&Khandker (1998), Khandker (2005), Zeller, et al (2001).

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