disseration on role of microfinance on micro business

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  1. 1. Title: Analysis on the role of microfinance on the growth of micro business in eastern region of Uttar Pradesh (India) ABSTRACT 1
  2. 2. Purpose: This study is focused on gaining a better understanding of the role of Micro finance on the development of Micro-business in the Eastern region of Uttar Pradesh (India). It further aims to attain the clarity on Micro-finance, Micro-business and MFIs in general and the distinct ways in which they are mutually dependent in particular. It also looks at various factors associated with Microfinance and its adaptability. Methodology approach: A case study based approach has been followed in this dissertation. The primary data procured for the use in this case study was derived by interviewing the customers of Cashpor Microfinance Company and other MFI customers randomly in the Eastern region of Uttar Pradesh (India) along side of the observed data presented in the literature review mainly in the areas of Microfinance, Microbusiness, MFIs and Microfinance in developing countries(India). Findings: The findings of this dissertation illustrate the role of Microfinance in general, on the development of Microbusiness & the support they derive from the MFIs and the improvements desired. Majority of the respondents indicated a positive impact and unanimously reflected that the impact completely depended on how the business functions and how effectively the independent owners exploit the resources. Additionally they expressed concerns over the high interest rates and the non-flexible weekly repayment plans. Practical Implications: This dissertation concludes that there is a lot of scope for the development of many more Microbusinesses by utilizing the funding offered by the Microfinancing institutions. This would not only facilitate the development of the country by contributing to the overall growth and income generation but also aid in improving the quality of lives. 2
  3. 3. Chapter 1 3
  4. 4. 1.0 Introduction The world does not appear to be poised with the rich becoming richer and the poor sliding the ladder of poverty. In spite of the best visible efforts by the governments, the number of people below the poverty line is not crossing the line significantly, especially in the developing and the underdeveloped countries. In order to alleviate the poverty levels many initiatives are being taken by the UN and other global organisations as well as the governments of individual countries. One such initiative is the introduction of Microfinance to aid those people below poverty line who do not have collateral to procure loans so that they could set up their own ventures or Micro businesses. Lots of people are taking advantage of microfinance which had bring about an immense aid, thereby contributing in the economical growth of the respective countries and also in sinking of the unemployment levels and hence contributing significantly to the business world, economy and poverty mitigation in specific. The Micro financing has shifted control from the local money lenders to the people who seek funds to start their own venture and that too at an affordable price. With the active role of MFIs across various parts of the world, especially in the developing nations, the outreach of funds to the remote corners of the rural areas has been feasible and has made it much more transparent and easier for the people below the poverty line to gain access to the funds and use their creativity to start their own Micro business. Considering all the aforementioned factors, author has made an attempt to probe further into the literature of the Micro finance, Micro business and the contribution of MFIs in the development of Micro businesses by considering the case study of a suitable developing country, i.e. India and subsequently conducting further study on the practical applications of the Micro financing in the Eastern region of Uttar pradesh (India) by interviewing the customers of Cashpor and other MFIs randomly to establish conclusion on its effect. 4
  5. 5. 1.1 What is microfinance? The word micro means small or tiny and finance is something which deals with money, hence the combination of both is something which has to be deal with small money either borrowing or lending. According to Morduch (1999) origins of micro finance and micro credit are found in areas of Latin America and Asia. As per (Anderson and Locker,2002; Mckernan 2002;Hermes.et.al.2005) In 1970, social programs came into light which aims to help poor people in earning their living with the help micro loans without any doubt. These programs had been reported successfully in contributing economic development and socially in most of the developing countries. Whereas Rogaly,et.al (1999) stated that everywhere in the world, financially disqualified people are benefited by micro financing services, as it helps them to boost their earning power by establishing some sort of business, which in turn help them to live better life. The institutes which are doing microfinance are termed as Microfinance Institutes (MFIs). As cited by (Ghatak and Guinnane, 1999; Bhatt and Tang,2001) the use of group bases loans or jointly- liability contracts are one of the practice that caught the interest particularly from point of view of theoretical economists. From one of the case of Grameen Bank in Bangladesh (which is one of the pioneers of MFI) and BancoSol in Bolivia, where they termed group based loans as solidarity loans (Mosley,2001). Where as in India, according to Seibel and Karduck (2006) Microfinance got its existence in 1996 and since then it is implemented throughout India, with National bank for agriculture and rural development (NABARD) as one of the self hand group (SHG), which is one the world biggest and fastest growing microfinance program. Granting of Progressive Loans is one of the unique practices of micro credit sector. The uniqueness of micro finance is there typical aspects vitality in proposing and implementing social capital as assurance whenever material goods are scarce. With the rise in microfinance business, the contest for donations and customers, as well as presence of for-profit firms had prominently made a remarkable impact of market discipline. As per Daley-Harris (2007) India is leader in micro financing clients, with 48.7 million clients from which 85 percent consists of poor women. Hence from above discussion it can be concluded that micro finance institute offers financial help to low income community in developing countries and acting as an agent in removing poverty. 1.2 Need for Microfinance: 5
  6. 6. The quintessential requirement for starting any business, even if it is the smallest, is the finances to support the start-up and its functioning until enough revenue is generated on a consistent basis. The primary source of procuring finances for the business is bootstrapping (income gathered from personal savings, borrowing from family or friends, by selling some personal assets, etc.). As in majority of the cases, especially with the limited means of poor people and their network, this option is not being feasible they resort to loans from banks and other formal financial institutions, which demand collateral security for sanctioning a loan. In reply to these requirements, to set up a Micro-Business, the rural people have been presented with a bright and attractive option of Microfinance. In simple terms it provides people in need with financial assistance to set up their business and get it running through an easy process. Institutions like credit unions, financial non-governmental organizations and even some of the commercial banks that participate in Micro financing, enable poor people to obtain tiny loans, procure money from friends working abroad and safeguard their savings. 1.3 What is Microbusiness? MicroBusiness is comparatively way too smaller than an usually referred small business. Whether the business is defined in terms of number of employees or the amount of sales per annum, microBusiness stands at a very small proportion to a small business. The definitions of microBusiness, could be differently expressed by different people or organizations such as: The number employed has been observed to be the most common determination of business size in policy circles (UK). According to (Stanworth and Gray, 1991; Storey, 1994; Johnson, 1999) the term micro business is defined as the businesses having employee less than 10 people, these business got popularity over the past few years. 6
  7. 7. 1.4 Conclusion Microfinance is the rider of a wide range of monetary services to low-income microenterprises and households. Loans and saving are the most important financial services offered by microfinance, although other services might also add to it like transferring funds, insurance etc. In more clear sense, it can be said that credit services to low income customers is the provision of microcredit, typically helping microenterprise in income generating activities by providing small loans. MicroBusiness owners are generally those who could be characterized as independents or self-employed people. Most of the Microenterprise is a one person enterprise and could be operate from their homes and sometime have part-time aid from a family member. 7
  8. 8. Chapter 2 Literature review 2.0 Define microfinance: A advance tool or technique that funds and offers monetary services and merchandise for example tiny amounts of loans, micro-leasing, savings, micro-insurance and money transfers to help out the very or extremely poor in setting up of or launching their businesses is defined as Microfinance. According to Ledgerwood (1999) The main groups that the MFI`s target low income self employed entrepreneurs who are into businesses like; trading, tailoring, street vendors, blacksmith, small farmers, artisans etc The use of Microfinance as Robinson, (1998)