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Microfinance in India: Rethinking finance and development

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Danny Linggonegoro

on 8 December 2013

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Transcript of Microfinance in India: Rethinking finance and development

Microfinance has been a controversial development initiative in India that has attempted to alleviate poverty since the turn of the century. It is a practice that allows for individuals that are impoverished to obtain small monetary loans that would otherwise be unattainable. By looking at a case study and research done by individuals, a greater sense of knowledge can be gained about the discourse of microfinance as a tool for development. As an industry, microfinance has grown significantly in India, but led to an economic bubble that was bound to burst. In 2011, there was a financial crisis in the microfinance sector due to the model of lending and borrowing that was practiced. In addition, by analyzing the crash and other criticisms of microfinance, it is possible to propose further research on microfinance. In this presentation, we will propose three experiments to obtain information on the microfinance institutions' (MFIs) effectiveness in reducing poverty in India and find possible solutions so that it can be used as a sustainable development tool to increase economic output but also to alleviate poverty in India’s poorest citizens.
Research Proposal
Importance of Microfinance as a Development tool
Earlier Work: History and Effects of Microfinance
Muhammad Yunus is the founder microfinance.
Goal --> to help the poor in his country escape the deepening pit of poverty
Provide loans that would otherwise be unavailable to them.
Ensure the loans are suitable to the individual
Teach sound financial practices so clients can help themselves
He determined that with small amount of money, personal initiative and entrepreneurship will spark and pull the poor out of poverty (“Muhammad”).

Experiment 3
Will survey

One thousand micro-financial borrowers from FOR-profit MFIs
One thousand micro-financial borrowers from NON-profit MFIs

Compare the impacts of non-profit and for-profit microfinance institutions.
Experiment 2
Experiment 1
Research Question:

What are the most essential components of microfinance to improve borrower success?
Experimental Procedure
We will conduct three experiments to isolate specific components of microfinance.

The target groups in all experiments will be surveyed by field researchers and data will be gathered from the MFIs being observed.

All experiments will take place in Andhra Pradesh, India and will run for 5 years. Target groups will be surveyed regarding financial statuses, income, happiness, and growth of business. Basic information will also be recorded, including number of people in the household, age, gender, assets, literacy status, and business/occupation.
What is Microfinance?
Will survey

One thousand microfinance borrowers
One thousand individuals who are not borrowing loans

The two thousand borrowers will be of similar economic status.

Determine whether or not microfinance is addressing the critical need of poverty in India
Will survey

One thousand borrowers from for-profit MFIs
One thousand borrowers from for-profit MFIs except they will have the following changes made to their borrowing system:

Implement international personal loan supplements to increase the size of loans.
Establish a ceiling cap on interest rates for emerging entrepreneurs
Create a reward system for entrepreneurs who employ workers, offering higher loan sizes and lower interest rates.

Assess the effectiveness of microfinance currently and microfinance after implemented changes

What is the Critical Need?
Poverty in India is a central problem that oppresses a large majority of the population (“Rural”).
More than 300 million people in India are in poverty which compares to the entire population of the United States (“India: Achievements”)
World Bank's measurement of poverty
The international poverty line = US $1.25 per day
World Bank stated 32.7% of the total people in India were living in poverty in 2010
Why is it an Important Undertaking?
It can be used as a development tool to not only increase economic output of the country, but also to reduce the poverty so we need to determine which aspects are working and which are not.
Thousands of MFIs that raised capital in India took loans from Indian and foreign banks. The collateral was the assurance that the women borrowers had a high repayment rate more than 95 percent. This created a ‘chain’ of debt that was bound to break at any sign of uncertainty in the markets. In 2011 the microfinance industry saw a crash similar to the sub-prime mortgage crisis of 2008/2009 in the United States (Wichterich).
To avoid future crashes and to answer the question whether or not microfinance is a sustainable tool for development, our research will identify which components are working and which are not. We will also study the effects of microfinance in our research.

Previous Work: History
Why is further research is important?
According to Shetty and Veerashekhrappa, “In 2003, 80 million clients across the world were being financially included by approximately 2,900 such institutions. India’s share in the global microfinance market in 2003 was 13% of all clients and 16% of the poorest clients”(as cited in Shetty and Veerashekharappa 7) It has the potential to alleviate poverty.
SKS Microfinance switched from a non-profit to a for-profit through its going public on the stock market. Does going for-profit benefit the borrower?
Impact of Microfinance
What are the Microeconomic Effects on Borrowers?
Case Study of SKS Microfinance:
Research has found that of the borrowers of SKS loans 95 percent are considered very poor (Akula 97).
On average the clients of SKS Microfinance are no longer considered very poor at the end of the study
The average per capita annual income for borrowers went from $113 to $150 when $133 is considered very poor (Akula 100).
Microfinance is the provision of loans for the poor (primarily women) for poverty alleviation; these loans are lent through a joint-liability model due to the poor having an inherent lack of collateral to provide for traditional loans (Akula 4).

The loan sizes from microfinance institutions are generally very small in comparison to commercial bank loans, hence the name "micro"loans.

It is common for the money to be used in an irresponsible manner.
According to Sinclair, “The benefits of the loan quickly disappear, but the debt remains, accumulating interest at an alarming rate, often encouraging the client to obtain another loan elsewhere to meet the repayments…” (Sinclair 5).
According to Wichterich, “… in only 9 percent of all cases did it really improve their economic situation in the long term” (Wicherich 410).
Microfinance does not help farmers.
Requires regular payments but farmers usually get only money when they harvest

Microfinance in India: Rethinking Finance and Development
Noah Kirschbaum
Danny Linggonegoro
Andrew Sherer
Richard Su

...to Acting Locally
From Thinking Globally...
Impact and Benefits of our Research Project
By identifying what are the most essential components of microfinance, we can improve the breadth and the depth of microfinance as a tool to alleviate poverty in India.

Once we isolate these components, we can offer our results to microfinance institutions to further the discourse of microfinance around the world so effective poverty alleviation is widespread.
Full transcript