Microfinance:The Miracle Cure?
by Mirai Chatterjee
Self Employed Women’s Association, Ahmedabad, India
Presented at the World Economic Forum, Davos, Switzerland, 25-30 January, 2001
Nanuben Vittalbhai is an old clothes vendor. She and her husband grew papayas on their family’s land. But they couldn’t make a living, and so with Rs 7 (US $ 0.06) they arrived in Ahmedabad city, twenty-five years ago. Nanuben was a keen businesswoman. She borrowed some money from her parents and started an old clothes business and began to save. Then her aunt told her about the Self Employed Women’s Association (SEWA) and its cooperative Bank, SEWA Bank. She opened her own bank account and deposited her savings in it. Soon she took her first loan of Rs 500 (U$ 11) and never looked back. Nanuben has now taken twenty loans - the last eight have been for Rs 25,000 apiece. Her net worth is now Rs 500,000 or US $ 10,867.
Chanchiben is an agricultural laborer. She has no land. She lives in Vichchiya village of Ahmedabad district. Chanchiben joined SEWA and her village savings group and saved regularly. Her balance in SEWA Bank swelled. She took a collateral free loan of Rs 5000 or US $ 109 towards buying a buffalo. From her earnings she paid off her loan and repaired her house. Then she took another loan and built herself a new house and stable for her buffalo. Now she has a steady income and is not solely dependent on work in the landlord’s fields. Nanuben, Chanchiben and millions of other women have saved, proved that they are credit worthy and have led the microfinance movement.
This movement has resulted in capitalization of the poor and has helped many families come out of poverty. Their lives have changed. There has been leadership-building, capacity-building and understanding of financial management among women and local communities who are barely familiar with the written word. These grass roots-level women have developed their own village-level savings and credit groups, their mini-banks, their district level organisations and even their own full-fledged co-operative banks like SEWA Bank. This experiences are not to restricted India. Describing the Bangladesh experiences with microfinance, Naila Kabeer writes: "Access to loans in their own name has indeed helped to lessen the bleakness of the trade off that many of the women have had to make in the past between valued dimensions of their well-being. Access to credit has allowed women-as well as men - to meet survival goals and put their livelihoods on a more secure basis, without compromising their dignity and sense of self worth. "1
But we have a long way to go. Microfinance alone is not a miracle cure. Our experience at SEWA points to the fact that it is an important tool in women’s efforts to strengthen themselves economically. But it is not the panacea or miracle cure for poverty. Let me explain.
When SEWA began to organise women workers almost thirty years ago women repeatedly told our founder, Ela Bhatt, that indebtedness was keeping them in poverty. And yet they were regular savers. They said they needed safe keeping of their savings and affordable credit services. They wanted to be free of money-lenders, middlemen and usurious merchants once and for all. At that time, no bank would entertain requests for opening poor women’s savings accounts. Even today, despite clear policy directives, it is difficult to do so. And loans for poor women three decades ago were even more of an impossibility.
SEWA members took courage and contributed a day’s worth of earnings to set up their own bank. That itself was a struggle, as no Reserve Bank of India official was ready to license a poor women’s bank. Today SEWA Bank has grown from a cooperative of 4000 women to one with 150,000 depositors and Rs 400 million or US $ 8.7 million working capital. SEWA Bank’s average loan repayment rate of 90 % is substantially higher than that experienced by public sector banks, which usually average between 60 to 70 %. This confirms the premise that the poor are credit worthy. And SEWA Bank has shown that it is possible to build financially sustainable institutions catering to the credit needs of the self-employed poor. Financed entirely by small deposits from poor working women, SEWA Bank is affectionately called 'Our Mother’s Home', a safe haven, by its clients.
One clear lesson, however, is that poor women need appropriate delivery mechanisms suited to their situation and doorstep banking, decentralized to the grassroots level, in order to reach financial services effectively. Despite all these customized delivery mechanisms in place, SEWA Bank also taught us that microfinance alone is not the only solution to poverty reduction. When women failed to repay loan installments on time, we learned that repeated illness and consequent heavy medical costs caused delays. Or unprecedented, heavy rains with flooding of depositor’s homes caused damage and destruction to fruit and vegetable stocks and work tools, setting back the clock and keeping women in poverty.
It is also taught us that with continuous capacity building efforts, including training in financial management, accounts, book-keeping and even managing a small group, women can become effective financial managers, and slowly their community or villages’ leaders. But these capacity building inputs are crucial. From our banking experience, we also learned the need to move to new microfinance services. Some of the shocks that women face like illness and natural disasters were mentioned earlier. Providing integrated insurance services along with savings and credit ensures that women can withstand risks and crises. In particular, women need coverage for life widowhood, accident, hospitalization , maternity and natural and human disasters like riots.
Also, women expressed the demand for a range of savings products for old age, children’s education, weddings, housing and basic infrastructure and other purposes. Equally, they demanded a variety of savings collection mechanisms : at their homes or place of work; some preferred daily collection, some weekly, whilst others monthly. In other words, women’s life cycle needs need to be addressed through appropriate, tailor-made financial products, including savings, credit and insurance. In sum, our experience at SEWA points to the need for an integrated, holistic approach to poverty removal. Capitalization and asset-building are only a part, although essential components, of poverty elimination. Over the years, we have identified some of the other components for poverty elimination through people-owned economic activities and entrepreneurship. Some of these are outlined below.
Linking Microfinance to livelihoods
Microfinance must necessarily be linked to livelihood and employment promotion. As in the case of Nanuben and Chanchiben, mentioned earlier, microfinance needs to be linked to women’s individual economic activities. Specifically, interventions have to be undertaken to ensure that the backward and forward linkages are in place to support women’s economic activities.
For example, SEWA organized vendors like Nanuben into their own union. One of the major issues they faced was harassment by the local authorities including the police. The latter often accused them of selling stolen goods and demanded to see receipts and proof of purchase of their old clothes. Many a time their old clothes were confiscated and the vendors themselves were arrested on false pretexts. Or they were evicted from the markets as they are considered a "traffic obstruction" and "nuisance". All of this cuts into Nanuben’s and other women’s incomes and business. These and other issues have to be addressed so that she can work and earn in peace. And so that her business can develop and flourish.
Similarly, Chanchiben got a new buffalo. But her earnings were actually enhanced when SEWA organized her and other village women into their own milk cooperative. They were then linked - up to the district dairy federation which arranged for daily milk collection from Chanchiben’s village. The women got daily payments per liter of milk based on fat content. Meanwhile, the marketing was handled by the district’s milk producers’ federation freeing the village women from the private traders and merchants who paid low rates per liter of milk and often doubled up as money-lenders, keeping women in poverty.
Both Nanuben and Chanchiben’s experience point to the fact that the poor must be organized into their own membership-based, democratically functioning organisations. If Nanuben didn’t have her own bank, SEWA Bank, to give her collateral free loans, it is doubtful whether she’d have made the journey from Rs 7 to her net worth of Rs 500,000. Also, if SEWA hadn’t taken up her struggle to pursue her business in peace free from regular evictions by local authorities, her business may not have flourished. Similarly, Chanchiben had a regular marketing mechanism through her cooperative for the milk her buffalo produced - that made all the difference.
Our experience at SEWA has been that without their own organisation or institution, poor women entrepreneurs cannot stand firm in the marketplace. They need the solid backing of an organisation that will help them in their struggle against unscrupulous traders, middlemen, money-lenders and sometimes their own men-folk, and to towards their goal of self reliance through viable businesses. Individually, they just cannot make it.
Further, collectively they become a visible force and their voices begin to be heard even at the highest policy making levels. Chandaben, a founder of SEWA Bank and Nanuben’s aunt, effectively addressed a forum of Finance Ministers of three countries, including our own, and the country’s top bankers, only because she had the backing of her 300,000-strong union, SEWA, and SEWA Bank. All across India, women and men have built their own microfinance and other organisations. There is ample evidence that these burgeoning people’s organisations led and managed by local people, especially women, are the engines for social change.
Earlier we mentioned that poor women can run and manage their own microfinance institutions and businesses. Sustained, appropriate capacity building inputs in financial services, management and leadership skills, however are essential if these institutions are to thrive and grow. At SEWA, we have seen that when we place our faith in women’s abilities and potential and when we develop tailor-made training and exposure programs, women learn very fast, regardless of literacy levels. SEWA Bank’s own Board of Directors have proved to be fast learners. All workers themselves, they can now read the bank’s balance sheet and monitor financial transactions. They fix the Bank’s lending rates, pegged at the market price, ensuring both their own organization’s economic viability, while being much lower than the money lender’s rate, which is the only other alternative available to women like themselves. It is a constant process of enhancing people’s strengths and adding on new skills and knowledge. Sometimes it is quite a rapid process, other times much patience and persistence is required.
Microfinance with Social Protection
In describing the lessons learned from SEWA Bank, we mentioned earlier that the need for social protection - health care, child care, insurance and shelter - emerged strongly from the depositor’s day-to-day experiences. Given the multiple risks and vulnerabilities of poor entrepreneurs, this issue can’t be emphasized enough. Too often we have seen how a woman emerging from poverty has slipped back due to heavy expenditure on, and hence debt, due to sickness, or when her last loan installment for her house was paid to SEWA Bank, and then her house was destroyed in a fire.
Further, how can a woman equipped with a loan develop her business if she has nowhere to leave her baby or young child ? At SEWA, our studies show that incomes increase by over fifty percent when child care is provided to working women. It is no accident that our loanees are vociferous about demanding child care centers run by SEWA.
Policy action in Microfinance
Poor women the world over have proved that they are bankable and competent financial managers. Compared to earlier years, there is both a greater understanding and appreciation of microfinance and its potential as a means to help families fight against poverty. But there is still a need to go deeper into how mainstream financial institutions, especially commercial banks, can be involved in microfinance. Realizing this, in India, we have the India Policy Forum of all the major microfinance institutions (MFIs), the Reserve Bank of India (the government), and several banks. Similarly, Indian MFIs, have formed their own organisation, Sadhan, to form a self-regulatory organisation pressing for policy action in the area of microfinance for the poor.
In our country, despite some positive strides, there is still a tendency towards providing subsidies to the poor, causing gross market distortions. Also, where national agencies provide bulk funds to be on lent through microfinance agencies to the poor, there is a tendency to prescribe terms and conditions which are neither user friendly to sustainability nor to the poor. These terms include unrealistic caps on interest spread, inflexible utilization norms and long bureaucratic delays due to procedural bottlenecks. This threatens the strong self-help group movement in microfinance. In any case, MFIs will take time to reach the scale and outreach of the mainstream banks. It is important to get the mainstream banks to treat the poor as an alternative business line and as an important market segment.
Finally, policy-make have to recognize the important role of the informal sector in national economics. And it is in this sector that the microfinance movement is strong and growing. In India, the informal economy engages 92 % of the total workforce and accounts for 63 % of GDP, 55 % of savings and 47 % of all exports. Despite this significant contribution, people in this sector, predominantly women, remain poor. In the world of work, the overlap between women, informality and poverty is very clear. And it is these women who have proved to be regular savers and very credit-worthy. Thus if we want to eliminate poverty by raising incomes through financial services and employment promotion, we must recognize the informal economy and strengthen the millions who eke out a living in this sector.
Over and over again, and in country after country, we have seen that the poor, especially women, are ready to develop and take advantage of microfinance. They want quality services and a favorable policy environment, not subsidies and charity. And they need to build their own MFIs and people’s organisations which take care of their life cycle needs, are non-corrupt and appropriate to their needs and economic pace. Today they not only want financial services but want to run these themselves. Let us support their efforts.
Elaben R. Bhatt, Founder of SEWA and SEWA Bank, helped me formulate and conceptualize this paper, as did Jayshree Vyas, Managing Director of SEWA Bank and Smita Ghatate, Consultant, SEWA Bank. I sincerely thank them for their assistance.
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