Title: Analysis on the role of microfinance on the growth of micro business in eastern region of Uttar Pradesh (India)

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ABSTRACT

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 MFI’s 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, MFI’s 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 MFI’s 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

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contributing to the overall growth and income generation but also aid

in improving the quality of lives.

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Chapter 1

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 MFI’s 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 MFI’s 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

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the Eastern region of Uttar pradesh (India) by interviewing the customers of

Cashpor and other MFI’s randomly to establish conclusion on its effect.

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.

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1.2 Need for Microfinance:

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

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business” is defined as the businesses having employee less than 10

people, these business got popularity over the past few years.

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.

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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) confirms that most prevalent in

economies that are still developing and where the SME`s do not have

financial support through any sources. Ledgerwood, (1999) states that the

training and development of members, group building and boosting of their

self confidence and the management of finances and the education of

banking procedures, handling of finances are provided by some of the MFI`s

in addition to the Financial aid and support. Some of the different

Microfinance (MF) service providers are: Credit unions, non bank financial

institutions, commercial banks, banks owned by the government, loans and

savings cooperatives and Non government organisations (NGO`s).

2.1 Organisation of microfinance institutions: (Mircofinance triangle)

As stated by Zeller and Mayer (2002) the best way to gauge how well the financial sector is acting as a monetary intermediary for SME firms is by studying the 3 key performance areas of financial sustainability, impact and outreach It was stated that these 3 key performance areas form the triangle whose focus goal is to ameliorate the living standards of the poor. The objectives of expansion i.e. Millennium development Goals (MDGs) are to condense poverty and this task is accomplished by increasing admissions of the poor to schools, living standard sustenance and improvement, women’s

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empowerment and education are certainly essential requirements (Morduch et al, 2003).

The monetary sector can support the progress of ME/SMEs either indirectly or directly. The direct support can be extended by ensuring higher accessibility of the monetary services to the unfortunate people living below poverty line. according to Zeller et al (1997) Some ways by which it is done are by influencing income production activities so that more income is generated to be utilized by the poor and then ensuring stabilisation of utilization by creating systematic and innovative systems that work in accordance to the MFI’s goals and improve the condition of the poor. The indirect method is by identifying a sustainable monetary system as a precondition for societal and financial expansion. Somehow there has been a hypothesis shift in opinion about related policies for the progress of the economic sector and specifically in the area of microfinance since 1990s. This shift was brought about due to the failures of tiny cultivator credits and achievement of few of the MFIs. The financial strategy has altered due to this shift and it is supported on the alleged ascend connecting the demand for credit and reserves services, and how these services can have access to a specific target group. It was in the past that more emphasis was placed on improving the outreach to tiny agriculturalists from 1960s to 1990s to the deprived. The level at which poor were being approached was focused on helping more and more poor to cure the grass root units and therefore owing to different methods and approaches in operation, microfinance institutions are set out differently by various authors.

The critical triangle of microfinance is a virtual triangle made from 3 strategic goals of MFIs – Outreach, ,monetary sustainability and Impact. As cited by Zeller and Mayer (2002) Various objectives and approaches of the MFIs contribute more towards ‘impact’ goal but at the same time cause insufficient outreach. Similarly other aims may create inadequate impact but maybe extremely financially sustainable, whereas Sharma and Buchenrieder(2002) suggest that the impact of finance can be augmented through a balance of non financial services such as ME/SMEs or marketing services, or education of borrowers that elevate the success of finance loaned projects The MF impact evaluation study reconsidered that the poorest person could also benefit from microfinance by receiving a steady utilization through the supervision of their funds and borrowing behaviour. It is well-known that the administration of loans for useful purposes with the endeavour to elevate revenue and resources can be efficiently done by individuals just under or just on top of the poverty line. Amplification in fiscal services will comprise an affirmative result in the wellbeing of the poorest other than not essentially to raise them from dearth because of the want for right to use to market, machinery, and other issues that lift production.9

Fig 2: the critical triangle in establishing economic sustainability of microfinance

The microfinance triangle demonstrated in the figure 2 consists of an inside sphere that signifies the dissimilar forms of institutional advancements such as employing expenses, reducing information that progresses fiscal sustainability. According to Zeller and Mayer, (2002) who state that the Institutional innovations contribute in accomplishing the goal of improving the ‘impact’ are design demand-oriented services for the underprivileged and extra efficient guidance for the customers. Outreach to the deprived for instance more efficient targeting methods or the introduction to lending expertise that create a centre of attention towards particular group of customers. The circle on the outside presents the socio-economic

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Institutional Innovations

Outreach to the PoorFinancial

Sustainability

Impact

surroundings in addition to the macroeconomic environment and the segment policies that might influence the recital of monetary organizations.

2.2 Micro finance client and services to their client

Most of the client of microfinance is from the group which is having low

income and they don’t have a reach to formal finances and they might be self

employed or domestic based entrepreneurs. In the backward areas where

there is limited number of organisation to support living, these constitute

undersized farmers and rest doing some small income generating occupation

like processing of food and petty trade whereas in urban areas they consist

of shopkeepers, street vendors, artisans etc. The vulnerability of the

microfinance clients due to poverty and unstable source of income makes

them prone to frauds if they look for finance elsewhere. The access of

financial institutions is recorded to be inversely related to the income which

means the poorer masses have difficulty getting help and even when they do

get the financial agreements are far more expensive. Microfinance readily

accepts such clients who have been excluded and underserved by the

informal arrangements.

Microfinance is helpful in cases where the poor farmers who may not borrow

but would like to save the earnings of their harvest which will be consumed

over several months for fulfilling the needs of their everyday living. Financial

access is the key to economic growth in the developing and transition

economies while stimulating the inclusion of certain population in the

developed countries. It empowers people with the opportunity to open an

account, increase their savings and insure homes and take loans thus

breaking poverty. In this manner they are protected from the exploitation in

the hand of relatives, moneylenders and other informal sectors which existed

traditionally and had no set rules or standardised procedures. The fact that

the poor do not have any fixed income aggravated the issue since majority of

them did not have substantial collateral to gain access to formal financing

institutions.

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Financial intermediate or the supply of monetary services or products for

instance credit cards, savings, payment systems & insurance should not

need current subsidies. Social intermediation is the procedure of structuring

social and human assets required by Sustainable monetary intermediation

intended for the underprivileged. These Subsidies must be extinguished but

social supports may need subsidies for a desire period than financial

supports.

The services which are meant for micro enterprise improvement other than

financial services, mainly non financial services that help micro entrepreneurs

consider as business guidance, talent development, marketing and

machinery related facilities and other subsector study, which help the micro

entrepreneurs to establish his or her business in their respective field. This

can or cannot have need for subsidies and this look on the capability and

readiness of the customers to pay for these facilities. (Bennett, 1997;

Legerwwod, 1999)

Interpersonal services or non financial facilities that centred on progressing

the wellbeing of micro entrepreneurs consist of schooling, wellbeing and

education guidance. These Interpersonal services resemble to make most of

the current subsidies and are constantly supplied by benefactors who are

supported by local state, government or NGOs.

2.3 Need for micro finance

Majority of the population that is categorised as poor or below the poverty

line lack genuine access to basic services to procure finances so as to

support themselves to improve their living, manage assets or even generate

income. This is more applicable to the estimated population of 1billion people

stuck up in/by poverty, who reside in the developing countries. (Lennart

Bage, Microfinance: macro benefits, Ifad).

These people generally tend to depend on livestock as a source of livelihood and management of even these smallest assets could be critical considering their perilous living conditions with increased insecurities of the consistent source of income giving rise to lack of adequate basic needs such as food, shelter and clothing. To overcome poverty they need to generate enough

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income, that to on a consistent basis. With the available resources and the circumstances around, in many cases, they cannot procure a job in spite of having the required skill set to qualify as a skilled worker. Hence they are forced to opt for a self-dependent source of income that is just sufficient to cater to the basic needs of their family and if permissible also gather some savings out of it. As a response to it ‘Micro-Business’ stands out to be the most apt option that could be adopted considering their circumstances and requirements.

2.4 Products & services of Microfinance offered to SME /

microenterprise:

MFIs can put forth a range of products and services to their customers who

are mainly men and women below the poverty line or to some extent above it

say Bennett (1994) and Ledgerwood (1999). One of their most eminent of all

facilities is financial service which is frequently made available to end user

irrespective of their substantial financial condition and their clients

predominantly live in the rural areas and a major of them would be

uneducated or with basic literacy. Recognized financial institutions or banks

do not on a regular basis offer any financial assistance or loans to these

small businesses that are run by the underprivileged as they do not seem to

generate much profit and as a result are not worth investing in. The cost per

dollar to lend is very high to these people as they seek small loans and the

information they provide is most of the time not understood or substantial

enough for a financial institution to lend money on that basis. The collateral

they provide which is usually their farms or their shacks are located deep

within rural areas which are inaccessible. This high lending cost can be

further explained with the help of theory called “transaction cost”.

In the process of credit to borrower by the lender, which is a non financial

expenditure is considered as transaction cost, throughout and following the

issuing of the loan. The cost or loan sustained by the lender consists of;

expenditure of looking for funds to lend, expenditure of drafting credit

agreements, expenditure of selecting and filtering of borrowers, gauging

project achievability, expenditure of scrutinising loan request forms, cost of

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facilitating credit training to employees and borrowers, and the expenditure of

supervising and the commencing of the loan contracts. Bhatt and Shui-Yan,

(1998) bring to notice the expenditure that the borrowers may acquire,

expenses incurred as a result of the cost of acquiring a screening group

member for the borrowing group, expenditure of setting up a group, charge of

all the negotiations held with the lender, expenditure of all documentation,

moving costs to and fro from the lending institution, expenditure of time

wasted away from business or work due to the appraising of a project and

expenditure of meetings, etc Both the sides concerned with a venture will

establish the transaction cost rate. They are solely responsible for the risk

that they may face and need to find ways to reduce it.

When reaching out to the poor and underprivileged peoples Christabell,

(2009) confirms that there are several expenditures that are incurred usually

when it has to do with smaller amounts of loans. Microfinance triangle is

made up of institutional impact, outreach to the poor, and financial

sustainability. Adam and Piscke, (1992) agree that the financial institutions

are constantly trying to maintain costs at a bare minimum. However, the poor

are distributed and spread out in the enormous geographical regions and

districts that the cost of reaching out to them is very high and is an

unavoidable increasing day by day. The outreach of financial services made

available to the underprivileged and the poor comes at a high cost and for the

financial institutions to sustain themselves they have got to be patient and

determined so as to avoid disproportionate costs and unnecessary risks.

The delivery and services of MF products have transaction cost that are

incurred in order to have larger outreach. As stated in the FAO, (2005) some

of the MF institutions themselves visit their customers so that the customers

do not have to incur the cost of travel and transportation and therefore

reducing their overall expenditure during the process.

Break-even interest rates are essential for most businesses to survive and

the same implies to MFI`s as well. The rates of interest have got to be higher

say Hulme and Mosley, (1996a ) than the expenditures incurred as that

would be the only way that the financial institutions returns on Investments

can cover up for the overall expenditures. The interest rate which is higher

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than market rate is known as break- even rate, which in turn defined as

difference between cost of service or product and demanding cost. According

to Robinson,(2003) the loan interest rates are frequently at subsidised rate

and the difference that is seen between the costs incurred while supplying

and the demand of the services and products is what defines the break–even

rate being higher than that market price.

Although the amount of the loan requested by the micro enterprises is much

lesser than those requested by bigger ones whereas the interest rates are

equal for both type of enterprise. But Robinson, (2003) also points out that,

per unit cost is much higher for customers targeted by the MFIs who have

very small loans and own smaller savings in their accounts . Although there

are high interest levied upon the clients by MFI`s the applicants are capable

of paying back their debts and have seen to request for further loans more

than once. Rosenberg, (1996) implies that the social profit which are

benefitted by clients of MFIs surpass the high interest rates that they are

charged. Schmidt and Zeitinger, (1994) confirm that the clients of MFI`s

themselves admit that for them returns are not as important as the ease and

convenience at which they are able to access finances and funds. The high

interest rate is in a way a solution to the problem of unpleasant choices made

where it is necessary to pick between safe or unsafe work assignment or

projects. Therefore most of the time the favourable customers have to put up

with certain issues created due to some of the bad customers (Graham

Bannok et al., 1997).

2.5 Define microbusiness

Data and trade industry (1995) defines micro business as an independent firm employing less than 10 people. From the late 1970s, these firm have been growing significantly as cited by (Macann, 1993,Bannock and Daly,1994). If we look at the statistics provided by Data and trade industry, which state that micro business account for 94.8 percent of all business (DTI,1999).According to Kruse.et,al (1997) these micro enterprise are complex social organisation and the employees have a key position in their respective culture and any change within that organisation. Inside the context of micro-business, there is fundamental research gap related with management development and training. As cited by Johnson and Winterton

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(1999) that National skills task force research on the agenda of exploring management skills but ultimately drew attention to micro-business as a distinct entity but failed to present any specific analysis. There is no specific management role in micro-business, as the individual who set up his/her business is free to utilize the resources according to his/her choice or at discretion. Unconditionally, management of micro business context was viewed as identical with the management in small, medium enterprise (SME) context. But this can be argued, as a manager in micro enterprise should be familiar as a group in their own right because of number of reasons. For instance, managers in micro enterprise are well placed to influence the growth of their firm as the role of CEO, line manager, director are undertaken by one person/people.

Hence from above context we can assume that micro-business is a smallest form of businesses, which are created by individual independently, to make their life better and generate income. This definition would never suit the whole range of micro-businesses, but rather is intended to give an idea or regions to look at. There are billions of these operating all over the world. Although micro-business are smallest of all businesses, but still they playing an important role in the nation’s economic development and in generating more employment. National statistics of UK provide an indication of the contribution of micro businesses to the national economy. Table below summarizes the number of businesses in the economy over a variety of size, bands and the employment linked with these enterprises.

Number of enterprises, employment and employees in the whole

economy by size of enterprise 2000

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(Source: SME statistics for UK, 2001, www.dti.gov.uk)

In terms of numbers of enterprises in the economy, micro enterprises stand

out to be major constituents. Their contribution to employment is significant

as well, even though they are spread over a large number (3.6m) of

enterprises in the UK.

2.6 Need for micro business:

As highlighted above the significance of the micro business in economic

development and creating more employment for any nation’s. On focusing

into this issue, we can realize the need for promotion and developing micro

business so that their role towards the all round development of a nation.

The requirement for micro enterprise and micro business is because of

several reasons for example individual might be having a choice of being

independent, under qualified for few jobs category etc. There might be few

other reasons as well like keenness to work after retirement or work

furthermore to have more investing power to obtain income for fulfilling

personal needs. If any individual has an ambition to build or startup his or her

independent firm and have something unique or innovative idea, then he or

she might think of starting their own business to fulfill their ambition. If only

one member in the family or whole family is expertise in any of the field, then

also it play a important role in building family business.

There are certain cases, in which the situation of an individual plays a major

role in establishing the new business for example dismissal, lay off or long

term sickness etc. It may also due to keenness of an individual to modify his

or her lifestyle with more control over their life particularly finances.

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Though the aforementioned factors are important, they do not highlight the

most important factor of all that drives the need for micro business, which is

poverty or the need to earn more or just enough to support their families.

Most of these families are BPL (Below Poverty Line) and struggle to meet

their ends either by opting for sole business or family run. As a response to it

‘Micro-Business’ stands out to be the most appropriate solution that could be

adopted considering their circumstances and requirements.

2.7 Various Types of microenterprise (ME)

The MFI`s determine what activities that the target market is into, the kind of

population that needs to be served and at what development level of a

particular business needs their financing.

MFI`s offer slightly different level of products and services to the ME/SMEs

and the products and services offered are on par with the demands of the

market. The way in which the ME/SMEs are financed is also slightly different

as the financing is based upon the phase at which the business is, whether it

is at the yet to commence phase or is already in existence or a well running

and established, unstable, or has the potential of growth. What kind of

activities are performed by the business also is a main influence in

determining the financing help. For example is it into a commercial business,

social work or services or into manufacturing or production plays a vital role

in the deciding factor. (Ledgerwood, 1999).

2.8 Start-up micro enterprise

Though ‘micro enterprise start-up is not the focus of the research but the start up constitutes a major area that links the success of the MFIs and them achieving their goals. The poor is not highly educated and lacks professional knowledge or even the basic knowledge to understand the criticality of the opportunity of such finances. In common with their established counterparts, the poor who are about to start up, they face management challenges in marshalling scarce resources, planning, controlling, coordinating and motivating. Though the nature of these challenges may be different but theories of entrepreneurship as stated by Frank (1998), which suggest that

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as the firm grows or by learning rapidly through experience i.e. from unskilled entrepreneur to skilled entrepreneur, changes her/his behaviour which in turn helps them to make realistic approach on how to run the business’. The advantage of being an inexperienced or less skilled entrepreneur is that they’re more likely to work towards the strengths of the firm and in the mean time individual underestimate the businesses weaknesses and the threats posed by the competitors and external environment.

It is imperative to keep a check on the start up of the enterprise because these enterprises if started correctly can help in creating a chain of sustainable business enterprises which will be run by the poor. Such systems will lead to financial sustainability and its impact will be two folds, one on the economy as it will reap the benefits of income being generated at the root level instead of spending income on the root level; and the second benefit will be that it encourages other poor to surface and take steps to make a better living by borrowing loan from MFI. Therefore a successful start-up itself will meet 2 of the main strategic objectives of ‘Outreach’ and ‘Financial sustainability’.

In most of the European nations, there is no change in the number of new business created every year while if we look at the business failure rate within first five year which didn’t gone down whereas currently half of all new business fails within this period. There are several reasons for their failures but according to Blewitt (2000) one of the reason is that there are lots of small business stated up without sufficient preparation, lack of management knowledge and skills, which in turn get them in problems from the very first months of trading.

As per cited by European commission (2003) The critical nature of start-up has been widely recognised by the European commission for the development of entrepreneurship in Europe and also emphasised on the promotion of more thriving organisations. But according to (Department of trade and industry, 1998; department of trade and industry, 2001) In UK, the significance of encouraging individuals to start business has been correlated with the wide expansion of culture of enterprise and ownership.

As cited in Austrian Institute for Small Business Research (2002) lots of programmes have been organised with widespread collection of organisation who provides financial and business services to new business starter by means of subsidies, government and institutions supports to inspire advance level of business development.

But (European commission, 2002; HM Treasury, 2003) state that there is increase in the anxiety on how to reduce barriers for new business start-up thereby rises focus on reducing/removing administrative and regulatory constraints. Moreover (Department of Trade and Industry, 2001; European

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Commission, 2003) state that main factor that influences individuals inclination to start-up their own business are cultural and social values.

2.9 Rise and growth of ME/SMEs

The main aim or purpose of any firm is to grow and make a profit. Penrose,

(1995) defines a firm as a governing body whose judicial unit or enclosed job

might increase with time by gathering of both physical resources, substantial

or resources that are human in nature. The word growth in this perspective

can be defined as amplification in size or other substances that can be

measured or a process of transformation or enhancement. As cited by

Penrose (1995) that size of a firm is the outcome of its development whereas

its development is a process but enterprise size is a condition. Ghoshal et

al., (2002) confirm that the increase of a firm can be established by supplying

labour and suitable supervision, prospects for investments that are beneficial

and resources. The decisive feature for a firm’s development is the

accessibility of assets to the organisation.

Enterprise improvement services and business improvement services and

other non-monetary services are made available by various MFIs taking on

the integrated approach. As stated by Ledgerwood (1999) services that

nonfinancial, MFIs are pursuing marketing and machinery services,

commerce guidance, production instruction and subsector analysis.

Enterprise improvement services can be classified into 2 groups. One is

enterprise configuration whose work is to provide guidance to individuals to

obtain skills in a particular area like welding and as well as individuals who

want to set up their independent trade. The second sort of enterprise

improvement service provided to its customers is the enterprise conversion

program which is to prerequisite of industrial support, skills and training with

the purpose of enabling current ME/ SMEs to go forward in terms of

manufacture and marketing. An Enterprise improvement service is not a

requirement for getting hold of monetary services and they are not presented

without charge. The charges applicable to these services are sponsored by

the government or an external body as to recuperate the complete cost in

offering the services will be unfeasible by the MFI. Ledgerwood, 1999 agrees

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that the enterprise improvement services might put some significant

especially to enterprises but its role and awareness that is gained cannot be

calculated because they do more often than not including any solid product. It

has been noted that there are small or negligible variation among enterprises

that obtain loan alone and those that obtain both loan packages and

incorporated enterprise improvement services.

2.10 Microfinance &ME/SMEs (a missing link)

Accessing credit appears to be a significant feature in heightening the progress of MEs/SMEs. It is believed that credit grows income levels, rocketing employment and by this means lessens poverty. Hiedhues, (1995) accepted that access to credit alter unfortunate people to get the better of their funds control and initiate few investments like the enhancement of farm expertise contribution which in turn lead to a boost in farming production.

As per stated by Navajas et al, (2000) the aim of microcredit as per to progress the wellbeing of the poor consequently to make it possible for them to have improved access to little loans which cannot be obtained from the recognized monetary institutions. Whereas Zeller and Diagne (2001) dispute saying that not enough access to loans for the poor who are just beneath or just over the poverty line might have harmful effects for ME/SMEs and in general their performance.

Access to credit more than before in rocketing ME/SMEs risk-bearing capability and enables expenditure balance overtime. With these points of view, it can be assumed that microfinance improves the wellbeing of the deprived and the poor.

Buckley (1997) argues that, pointing of the achievement of microcredit programs that is to say outreach; huge refund rate and monetary sustainability may not take into account what role it has on micro enterprise procedures and only focusing on “microfinance evangelism”. Conducting a study in 3 countries; Malawi, Ghana & Kenya, according to Buckle (1997) develop an understanding that there was modest information to put forward that any noteworthy and sustained role of microfinance services on customers in terms of ME/ SME development, amplified revenue flows or stage of employment. The main point in this enhancement is that the betterment to gain microfinance services and market for the underprivileged

21

people would not adequate but until the transformation or enhancement go along with adjustments in machinery and or procedures.

Whereas Sharma and Zeller (1998) argue that microfinance services can aid in the betterment or set up of family endeavour, potentially creating the distinction among decrease in poverty and reasonably securing their economic life. Alternatively, Burger (1989) points out that microfinance is inclined to steady rather than amplify revenue and tends to maintain instead of creating or generating jobs.

Most of the micro enterprise or micro business do not have urgent or easy

access to finance, which is needed to start a business therefore they either

start their business with tiny money which is self financed by bootstrapping or

from the institution that can fund them money without any collateral security.

To the response to this issue, microfinance emerged as the best solution not

only to satisfy the need of micro enterprise start up, whereas it also plays an

important role towards the development of economy of a nation.

2.11 Role of Microfinance

Microfinance has empowered women or the people below poverty line (BPL)

by giving them financial support which is easy to access, handy and low-cost.

It encourages the poor to work independently, earn a living and respect while

making their own choices. Such benefits largely impact the lives of the poor

when provided on a large scale continuously.

Socially the impact of microfinance is on 3 levels namely Domestic,

community and geographical level. It gives access to a better modified

income level at domestic as well as community and geographical levels. In

the social impact studies, social change had been observed at various levels.

1) Domestic level- At this level Microfinance clients receive better education

and acquire basic skills and financial knowledge for further development.

It empowers women who are the preferred partners of MFIs by placing

them higher in society and giving them better education and

independence which contributes to a positive development of the country.

On a personal level it improves the education, healthcare, sanitary

22

infrastructure ad food supply thus creating better living conditions. It also

gives the residents the confidence to cope with economic crisis through

savings, credit and micro insurance products.

2) Community level- On the community level the impact of microfinance

has led to good quality labour enforcement with higher choice of jobs

by creating number of jobs at various industries. Microfinance can

lead to higher and more stable income of community making it

resilient to economic crisis as a whole. The entrepreneurs who started

their business with the help of microfinance raise trade with nearby

communities and regions, as a result trade and economic condition

improves. By giving access to financial services microfinance triggers

healthy competitions between community members encouraging more

number of entrepreneurs. It also supports cohesiveness of community

as its members educate each other in the context of improving their

savings and credibility.

3) Geographical level- Microfinance leads to more number of regional

jobs and strengthens the financial industries as a whole thus increasing

its scope and outreaching remote locations. By increasing rural jobs and

support income and employment on a regional level microfinance

mitigates the pressure on natural resources as lesser number of people

shift to urban areas looking for employment. Microenterprise sector is the

backbone of the economy as it provides three quarters of jobs and the

impact of microfinance can be felt in this sector as it further strengthens it

in the market.

2.12 Impact of micro enterprise in India:

Micro Enterprise has contributed hugely towards the eradication of poverty,

while enabling the development of the economy and employment ratio of the

nation. Looking closely at it, India, a developing country has been

significantly affected by the microenterprises since they were launched.

There has been a substantial and consistent growth since then.

23

As per the “4th All India Census of Micro, Small and Medium enterprise 2006-

2007” report, the size of register MEMS sector (Micro, Small and medium

enterprise) is provisionally estimated to be 1552491. Of these, the proportion

of micro, small and medium were 95.05%, 4.74% and 0.21% respectively.

Detail of working enterprise Micro Small Medium Total

No. Of manufacture enterprise 974609 57666 2828 1035103

No.of service enterprise 501072 15915 402 517389

Total no. Of MSME 1475682 73581 3230 1552492

% distribution of total unit 95.05 4.74 0.21 100.00

% share of manufacture unit 94.16 5.57 0.27 66.67

% share of service unit 96.85 3.08 0.08 33.33

(Data from- Fourth all india census MEMS 2006-

2007)

Employment: Even employment has escalated from the preceding census to the present

by around 26.5%, from 4.48% to 5.93% (per unit employment) , as registered for the MSME

sector.

Detail of

employment Micro Small medium Total

Manufacture unit 5320046 2055762 608513 7984321

Service unit 1040494 153723 24826 1219343

Total no. employed 6360840 2209485 633339 9203664

% distribution of

employment69.11 24.01 6.88 100

24

(Data from- fourth all india census MEMS 2006-

2007)

Gross output:

Gross output is an economic concept representing the national account for

the country.

It is the value of the net output or the GDP (Gross Domestic Product). The

gross output of India in 2005-2006 was 6.9% and it grew up to 7.09 in 2006-

2007, whereas 3years later it reached 7.2%. The following table exhibits the

4th All India census MEMS 2006-2007, which indicates the contribution of

each sector to the national account i.e GDP.

Enterprise

(Sector)

Gross output (in crore)

Micro Small Medium Total

Manufacturing 266919 272718 129300 668937(94.29%)

Service 20875 15140 4516 40531(5.71%)

Total 287794 287858 133816 709468

(Data from- 4th all india census MEMS 2006-2007)

2.13 How Will Technology Change Microfinance?

Technology can bring unpredictable changes to microfinance because of its

vast potential and young applications. Prediction like cashless banking

through cell phone payments, ATMs, internet and card products are

examples emphasising the role of technology as a wild card for microfinance.

Newer innovations applied to microfinance not only make it more secure and

convenient but also lower its cost. These innovations address some of the

process of microfinance business:

Credit process: Decision on credit taken by the credit bureaus in each

country can be automated to improve credit scoring and consumer

lending. By mastering the automated lending techniques the process of

25

lending can be hastened due to development of enterprise oriented

microloans. This will change the traditional role of the loan officer who acts

as the main contact for clients. The “credit factory” approach used by the

consumer lenders where several people will perform segments of the

microfinance loan officer’s responsibility will hasten the process of lending

cash. Once Microfinance embraces automated lending the entire loan

methodology will be changes as there will still be loan officers but their

efficiencies will be greatly increased through PDAs, cell phones and credit

scoring.

Back end methodology: The price of vital core systems is expected to

drop in the next decade making it easier for the small MFIs to purchase

reasonable off the shelf packages and focus better on the customers

by giving them customised products and offering automated payments.

The outsourcing of information systems over the internet to IT

specialists gives the possibility to open source projects. Promotion of

simple standard packages and interoperability can be helpful to

advanced institutions who wish to offer automated systems by

connecting to multi-institution payment systems.

Technology related automated payments like mobile phones, ATMs, internet

fee processors like PayPal and smart cards can reduce cash transactions

leading to a secured and inexpensive branch infrastructure reducing the

interest rates and fees of clients. Clients can conveniently make payments

closer to their locations at the grocery stores, pharmacies or telephonically.

Though the prerequisites for such transactions have not been established in

many countries the fast progress of technology is bound to change the

situation in next decade.

2.14 Conclusion

Considering the exhaustive data gathered in the literature review on Micro

finance, Micro business and other associated topics and their mutual

26

relevance, author concludes that lot of research has been carried out in the

field of Micro finance while leaving significant scope for further research on

the evolution and the growth in its applications. Hence author has made an

attempt to address one of such core applications of its impact in the

development of Micro business by promoting micro lending, though in a basic

manner by researching the effect of micro finance on micro business of one

of its most applicable areas in the developing economy of India. In order to

strengthen the research, author has presented and examined the literature

associated with Micro finance in the above section by initially presenting

various definitions expressed by different authors on what micro finance is.

Then proceeding with its author has also identified the need of micro finance,

its origin and the necessity to promote it.

Further to it the products and services associated with the MFI’s have been

illustrated.

Author then tried to link up the micro finance and its role in the start up of the

micro business. Instead of just focusing on the start up support, the research

also identifies the options of rise and growth of micro business and the

possible contribution of micro business to it. As a missing link between the

micro finance and the SME/ME, the option for the growth and the

accessibility of it has been indicated. Furthering on the previous role of micro

finance, its role at domestic, communal and geographical level has been

assessed. Then delving into the area of the case study all the relevant

information of Micro finance in India has been illustrated not just theoretically

but rather with a backing of facts and figures in the form of tables gathered

from genuine published sources. Not missing out on the effect of advancing

technology, its impact on the Micro finance and its possible future

improvements and applications has been presented.

27

Chapter 3

Research Methodology

3.1 Overview

The present investigation is centred on examine the role of microfinance in

developing micro businesses worldwide and especially in India. The

investigation has been performed by examining micro financing in Eastern

region of Uttar Pradesh (India), which is one of the areas where high density

of poverty is witnessed. The investigation concentrates on micro financing as

subject and micro businesses as context of case study on subject. MFI’s

have been identified to represent the concept of Micro financing.

The research is explorative whereas the methodology adopted is qualitative

which emphasises on choosing Micro financing practices by the Below

Poverty Line (BPL) after that people in rural areas by collecting information

by both means i.e. theoretically and by surveying random customers of

Cashpoor and other MFI’s in eastern part of Uttar Pradesh (India) to

evaluate its role.

Role has been analysed by calculating the change, MFI’s have induced to

the lives of its customers. The theoretical knowledge has been collected from

trusted and dependable secondary data sources like text books, journals and

web articles etc.

28

3.2 Philosophy of Research

It is one most essential thing while designing a project or thesis/dissertation.

According to David Carson,et.al (2001), who suggested that there should be

such methods that can explain and provide options for decision which might

be taken in continuing the investigation. This may explain that the

investigation would have inferences for causes, what, how and why the

investigation is conducted and helps in providing a broadened angle to the

investigation so that any investigation plan could have a vivid reasoning

within the bigger scope of project.

The systematic process of enquiring and investigating in a methodical

manner to contribute to the value in that field is generally termed as

Research. According to John W.Creswell (1994,p51) which defines the

‘research’ as a study which develop advance research question and reports

data to answer the question. Proper research lead by scientific and logical

methods and organised in proper channel can create awareness and solves

complex issue which are useful to a particular segment of the society at least.

Different dimensions attached with investigation are to be address so as to

clarify what the current text is not including within the entire scope of

research findings, but has a firm standing in a definite span of qualitative

research.

3.3 Interpretivism

After considering various philosophies of research the author notice

“interpretivism” is the most appropriate to examine the present investigation.

This approach is displayed at the end of the vertical scale; this is because

author who is carrying out this investigation believes that reality is created

socially. This account that our ‘reality’ is not so easy to understand only by

analysing what is, rather, whereas it is something which people in our

community, society or group form from various resources:

29

a) Reality is influence by the values and way of seeing the world i.e their

interpretation of reality.

b) Some other people interpretation

c) Compromise and agreement that originate from the negotiations

between the first two.

According to David Carson,et.al (2001) the term Interpretivism is excerpted

by bunch of other factors i.e qualitative approaches and concepts. Whereas

meaning of ‘interpretivism’ from the Greek hermeneuein is to interpret.

This philosophy enables the link between understanding and action as an

indirect one. The link between understanding and action is developed

through people’s thinking, knowledge, values or relationship with each other.

As the world is so complex, therefore it is not so easy to find the link between

understanding and action moreover the actions are not always clear.

According to Watson (1994a) this approach is used in analysis the

managerial role, management of change Dawson (1994), and strategic

planning Mintzberg (1994).whereas Fisher and Lovell (2000) used this

research philosophy in the study of business ethics cited in Colin Fisher,

(2004,p42)

This philosophy enables author to find out, what is going on in the present

scenario of micro finance and micro business so that the true picture can be

looked by analysing the past, present and field working of both the concepts.

Interpretivism lays emphasis on preferred modes of storing sources through

small samples and involvement of author which focus on coming up with

theories. Therefore the same approach is adopted in the present case of

conducting research on small samples.

Qualitative approach would be followed in this study as it involves the

analysis of findings and subsequently the result needs to be derived. This

30

suits the interpretivist philosophy and therefore would enable a thorough

application of research.

Theory building is placed in Interpretivism because it helps to build the

understanding and reasoning of the topic.

Deductive will help the researcher to build the conceptual and theoretical

structure before to its cross check through observation. Thus by creating

dimension for making observation, researcher is making a clear and sound

definition of what it is we are going to observe. Although the

operationalization of can defined as the ‘linking rule’ which can be stated as

the rules about when and where an observation instances of the topic has

empirically arrived. As we know that there is two side of every coin, here in

case of deductive also there is some negative or we can problems. The

deductive practice in science evidently what is involved in being ‘scientific

knowledge’ and frequently this approach are called as ‘hypothetico-deductive

method’. This approach highlight that what is vital to science is not the source

of hypotheses and theories, whereas it is the process through which those

ideas are justified and tested is more important. Normally hypothetico-

deductive approach to investigation is closely attached with the term called

‘positivism’. As cited in Keat and Urry, (1975, chapter 4), the 3 characteristics

of positivism are:

a) To view the method of process with evident success, in brief- the

experimental methods.

b) The explanation used and knowledge created in social sciences must

be the same as given by natural science.

c) The upper entails social scientists treating their subject matter as the

social world, as if it were the same as natural world of natural

scientists.

Induction approach in simple word can be defined as the learning through

reflecting upon past experiences. The dissimilarities between deductive and

induction is that in deductive approach, theoretical and conceptual structure

31

is develop prior to investigation, whereas in induction approach theory is the

outcome of any investigation. According to (Ryan, 1970;Johnson and

Duberley,2000) there is rivalry and debate between the deductive and

induction approaches. Nevertheless, in modern explanation for taking

inductive approach in social science means to revolve around two

arguments. Firstly, for anyone working on inductive approach should make

clear of social phenomena on the basis of observation and experience.

According to David Carson, et.al,(2001) which suggest that a mix of jointly

deductive and inductive philosophy is suited for the interpretive approaches

because former might forbid the growth of new and useful theory whereas if

author only follows the inductive approach could refrain deriving benefits of

current theory. Therefore it is necessary to weight equally deductive and

inductive approach and these two would be pick in this study.

The above mention approach and methodologies would be useful in the case

study and the research to follow.

3.4 Research Design

A very basic definition of research design was given by Vogt (1993), which

defines it, as the art or science of executing plans in achieving studies to get

most of valid finding, which helps the researcher to get to an conclusion.

Whereas according to Thyer (1993), it can also be defined as the expanded

plan or blueprint on how investigation study will be complete successfully.

The design for this research/study will establish on the case study of MFI’s of

the North-eastern region of India while the method adopted to collect data will

be by interviewing participate/customers of relevant MFI. Interview would be

conducted personally by researcher and the turnout would be detailed in the

following chapter.

Theoretical Framework

32

The theoretical framework followed in this study has been developed by

widespread research of the literature available in the fields of Microfinance,

Micro business, MFI’s as detailed in literature review i.e. chapter 2

3.5 Rationale behind the study

The rationale behind this investigation is to develop full knowledge on the

role of microfinance in the establishment of micro business by examine the

impact of both, in the chosen region. With the evaluation of even a single

study which might influence its growth may highly benefit rural areas and

whole nation.

According to author, microfinance is the recent development in the field of

removing poverty. Author has a deep interest in this topic and interest in

linking up this topic to the empowerment of poor and any useful investigation

on this topic not only raises the author passion but might provide a valuable

link to current literature. Aside from text knowledge obtained from the existing

course of investigation might useful in better realising of the modern day

governing polices/execution/practice.

3.5 Scope of study

The aim of this investigation is to provide immense range for the client of

micro finance and particularly to client of MFI’s worldwide specially India

because it throws light on all the links up which might influences micro

finance approach in wide perspective.

As this is core area of concern from the perspective of customers/MFI’s

client, this investigation might aid in interpreting their requirement so that

Micro financing institute would full fill their requirement successfully.

Therefore it is good to examine the exercise of micro financing at macro level

particularly in the rural BPL people so as to help in the reduction of poverty

and contributing towards the economic growth of the country.

3.6 Case study overview

33

For better examine and acknowledge of micro financing exercise, which are

currently executed in the every part of India but particular areas of eastern

part of uttar pradesh (India), is being studied by doing survey and analysing

the true practice adopted by various MFI’s operating in the region.

To achieve the aim and objective, author would execute a survey either by

personally visiting customer/client or by reaching to client through telephone

for collecting sample of wide range of customers and the market in every

possible sense. The creation of review sheet will be to facilitate the demands.

Aims and Objectives

Aim:

The aim of the present research is to analyse the role of Micro financing

in development of Micro business in the Eastern region of Uttar pradesh

(India)

Objectives:

To evaluate the concept of microfinance and micro business

Critically evaluate the importance of microfinance in development of micro business

Recommendation for the efficient and effective use of micro-finance in micro business

To study the Micro financing followed by the MFI’s based

in Eastern region of Uttar Pradesh (India), considering it as a case-

study to support the investigation.

3.7 Sample and data collection

As the research is exploratory nature therefore qualitative research

methodology is opted by the author. The core purpose of the research was to

gather detailed information about the Micro financing through MFI’s for

developing Microbusiness. Data was gathered by interviewing customers of

MFI’s chosen on a random basis with the variation of the time of interview 34

dependent on the information revealed by them and most importantly

considering their concern for data defending.

There are few customers/client who were passionate in sharing all the

realistic knowledge, while few of them are unwilling to answer the even

simple questions.

Contestant (Customers & MFI’s) were pick out from the Eastern region of

Uttar pradesh (India), as it is one of the most populous state of the India and

above all it is a developing state as well with a high development potential

for Microfinance. The requirements for selection (though random) were that:

Sample must cover the broadest possible range to get the hidden

information

They fall within the relevant topic.

Researcher had individually interviewed 8 clients/customers stressing on

fulfilling the above requirement. This sample of customers was subsequently

divided into 2 groups for two reasons:

1. Of the 8, 5 belonged to Cashpor Microfinance Institute and the rest to

other MFI’s

2. To get a different perspective of the MFI application and perception

among the customers

Although the Microfinance market and the eastern region of Uttar Pradesh

(India) is very large, therefore it a needed to keep an sample size to

reasonable size of 8 in order to justify the study, availability of time and

level of study into consideration.

3.8 DATA ANALYSIS

According to Tesch (1990) the process of data analysis is electric; there is no “right way”. It needs that the author is comfortable in developing different categories while marking comparisons and contrasts. It also involves that the author should be open to the various possibilities which arises during finding and also looks at the alternative justification for the finding.35

Qualitative examination differs from the quantitative examination of separating and occupying in different activities of data collection, analysis and writing result. According to Lincoln and Guba (1985) and more recently Erlandson, Harris, Skipper and Allen (1993) which discuss the necessities of setting up quality criteria like ‘trustworthiness’ and ‘authencity’. These are all workable stances on the question of existence and dependable.

In this investigation, author had interviewed with 8 customers/clients who had

participated was either transcribed or recorded with prior consent of the

customers while reassuring data and identity protection. All the data which

was gathered later converted into textual format for researcher analysis and

references. Validity was further improved by coming to logical conclusions,

which was based on the literature review. To maintain persistency in the data

gathering and evaluating standardized structure was followed for all 8

interviews (Appendix 2 for questionnaire). Data which was gathers was

evaluated on one to one basis across all the 8 participants.

Units of Analysis:

COMPAN

Y

INTERVI

EWEE

DESCRIPTION OF

COMPANY

ESTABLISHE

D IN (YEAR)

MICROFINA

NCING

(YEAR)

A Owner Agriculture 2000 2007

B Owner Animal Husbandary 2003 2008

C Owner Tailoring 2007 2007

D Owner Production 2009 2009

E Owner Retail outlet 2008 2008

F Owner Flour mill centre 2002 2002

G Owner Woolen Garments’ 2005 2007

36

UNITS OF ANALYSIS

Knitting and sales

H Owner Tiffin centre 2008 2008

3.8 Delimitations and Limitations of the Methodology

According to Castetter and Heisler (1997) it is defined as the research

dimension for the study originates the boundaries, reservations and

qualifications inherent in every study, which indeed know as delimitations and

limitations. It addresses how the study will be narrowed in scope. The

potential drawback of the study can be determined by limitation.

The intentional limitation specify by the researcher are termed as Delimitation

and in the present research they are the number of participants limited to 8

so as to justify the study and seeing time boundation, accessibility and level

of study.

The limitations experienced by the author in this investigation were the

acceptance of the MFI’s and their customers to participate in this research.

Time boundation was the key factor in establishing limitation for this project,

which also contributes to limitation in interviewing because of this only limited

information, could be gather for study. It is achievable to establish further

investigation in different related areas of study.

3.9 Ethical Consideration and issues

This is the most important part of any research and researcher should not

treat people unfairly or badly while gathering the information from them. It is

the necessary that researcher after gathering the information which was

discovered should not used it, in harming the participates involved in

investigation.

While conducting this investigation, author had make sure that all the

customers/participants, who are interviewed are aware that they are taking

37

part in this investigation. Even all customers/participants were informed about

the aim of this investigation and its use.

All the participants are keen to take part in this investigation therefore all

necessary practice and regulation was informed them.

One of the main requirement of the ethical issue is to protect the identification

of the participants involves in investigation. Therefore author here concealed

all the information of the customer’s i.e. their name, address and MFI’s

(Except Cashpor) thorough out investigation. Not just restricted to the present

set of time frame but the block on revealing the identity of the participants is

indefinite. If this is followed, then there are no issues of sharing this

information with University of Wales, Newport and to any other reader or

investigation purposes.

3.10 Conclusion of Methodology

The above chapter emphasizes on method adopted in achieving the research

successfully and examine change. By doing this section, a clear and sound

channel for carrying a investigation and gathering data by conducting

interviews following the proven philosophies. This approach followed would

enhance the finding and analysing the role of Micro financing in development

of micro businesses.

38

Chapter 4

FINDINGS, ANALYSIS AND DISCUSSION

4.0 Introduction

Approximately it has been around 3 decades, since the naissance of

Microfinance triggered by the Grameen Bank foundation in Bangladesh by

Prof. Muhammad Yunus. There has been a constant evolution and

adaptation of Prof. Yunus’ concept by several countries, especially the

developing ones. 2005, the Year of Microcredit by UN proved to be a turning

point for Microfinance due to private sector taking increased interest for what

was perceived as the realm of NGO’s. The estimates in 2006 indicate that all

the endeavours of contributing towards the alleviation of poverty and

amalgamate the poor in the world into constantly evolving markets. It is

estimated that only 5% of the potential clients would reached by micro

finance, a studied carried by consultative group to assist the poorest (CGAP).

39

In spite of this being just an estimate of the proportion of people not reached

by the financial institutions, it could be treated as a good source of

information to provide an idea about the proportion of potential customers yet

to be reached.

Purpose of Case study:

The present case study intends to throw more light on the aforementioned

literature on Micro finance and its effect on Micro Business. It is necessary to

consider a case study to understand and appreciate various concepts of

Micro finance and Micro Business and to associate the literature and

familiarise with the practical aspects of Micro finance and Micro Business.

The present case study discusses various attributes of a MFI(Micro Finance

Institution) based in India. The reason for choosing India is that it primiraly is

the second populous country in the world and caters to the discussion of

most of the aspects associated with present study. Secondarily as the author

is a native of that country, it is feasible to procure relevant information with

ease. India having 75% of its population below the national poverty line and

41.6% below the international poverty line, (World Bank) stands out to be one

of the front line contenders for the adaptation Micro Financing and to promote

the mushrooming of Micro Business.

4.1 Case study on Cashpor Micro Credit

CASHPOR Micro Credit is a poverty focused, not-for-profit company that

channels all of its modest surplus towards the expansion of its outreach to

more of people living under poverty line (BPL) specially women in eastern

regions of Uttar Pradesh and Bihar in India. It is a Section 25 Company and

has a commendably recognized social impact, with 2/3rd of its established

clients progressed out of poverty.

Mission:

40

The mission of cashpor is to determine and prompt inadequate women in

rural areas by providing financial facility to them in an efficient, timely and

honestly, in order to realize the vision while remaining a financially

sustainable Micro Finance Institution for the poor.

Features of Cashpor:

Initial loans ranging from Rs.2000 to Rs.8000 for additional income

generation.

Eligibility for a subsequent (increased if necessary) loan on the same

terms upon completion of regular weekly repayments

Bada (big) loans up to Rs. 25,000/- for matured clients with micro-

enterprises

Rs. 1000 loan upon demand for emergency, consumption needs after

first year of regular weekly repayment.

Easy weekly repayment of principal and interest in small, equal amounts

for one year.

Exclusively for BPL women

Forming a joint liability group (JLG) with 15 to 25 other BPL women that

could be trusted in matters of money and who agree to cross-guarantee

each other.

The loan will be disbursed within 2 weeks of approval by the JLG,

subject to availability of funds at the nearest branch of CMC. The

CASHPOR Branch Manager has the final say on the loan amount.

Affordable interest paid by clients: 26% on declining weekly balance;

Good opportunity for BPL women to work for a better life for their

children and themselves.

Focus:

The Cashpor India brand of micro credit is available only to women from

households living below the official poverty line income (BPL), as identified

by the Cashpor field staff who are specially trained for this task.

41

Company adopts a Cashpor House Index (CHI) suited to the conditions in

eastern regions of UP and Bihar to identify potential BPL families, those

scoring 4 points or less on that index. It means that they live in small houses

built with mud walls of less than 8 feet in height. It is followed by the source

of income and asset test to verify that the family in BPL, using the following

criteria:

income from seasonal agricultural labor to be 50% of the house hold

income,

there must be no irrigated agricultural land owned or operated as a small

farmer and

no significant productive assets in the form of large farm animals, etc.

The prerequisite of the above being that all of them need to be satisfied.

Cashpor is considering adopting the Progress out of Poverty Index (PPI) of

the Grameen Foundation USA, so as to validate its targeting against Indian

household income levels.

The effective management and dedicated efforts of the employees at

Cashpor has resulted in the growth of the company and enabled the outreach

to over 4.5 million BPL women, collectively contributing to a shared portfolio

of Rs.2.85 billion over 19 districts with a risk factor of only 0.5%, consistently

for a period of 13 years in a row since the establishment of Cashpor. It is this

collective system that enables continuous growth and support of the BPL

women to identify and setup micro businesses and utilize the micro financing

effectively and also ensuring the regular and timely repayment of the money

borrowed. The critical systems identified are:

Planning

The strategy for Cashpor has been to focus on the net increase in the

outreach towards the new BPL households and subsequently approach the

target for portfolio. In spite of the status of financial sustainability, inflow of

42

funds cannot be guaranteed on consistent basis regularly. Hence

management of liquidity involving funds along with the repayment planning

also has considerable impact on the business plan. Capital sufficiency could

be increased by providing banks with more comforting. These factors could

be overcome by planning for moderate growth.

Effective cash management would minimize the cost of funds and hence

ensure better utilization of available resources.

Mini Branches:

In order to increase the number of BPL women Cashpor reaches out to and

to maximize the adequate funding and efficiency of its use, it has strategized

to adopt the policy of Mini Branches. Cashpor’s field staff, Centre Manager

(CM) play an important role attending weekly Centre meetings in the villages,

ensuring full collection, taking loan proposals from existing clients and

motivating new clients to join CASHPOR, disbursing loans in a timely manner

and checking on their utilization, etc. in an efficient manner, in order to reach

their targets and to reach out to many more potential micro business owners.

To ensure that CM’s play their role effectively, at the bottom two levels, the

Branch and the Area, the span of control of the supervisor, i.e. Branch

Manager and Area Manager, is only four.

Having understood the functioning of the Cashpor company, the author has

interviewed few of the customers of Cashpor who have taken loan from it and

have set up or continuing to run their Microbusiness and are in the process of

repaying the loan. Alongside the author has also interviewed one of the

Managers to throw some light on the MFI’s perspective.

In order to get an additional frame of finding, author has traced and

interviewed people who have taken Microfinance from different sources and

have set up their own business so as to better understand the concept and

get a wider range of information in this compilation. The following findings

reveal the response to the interviews conducted by the author for the

customers of Cashpor followed by other Micro business owners.

43

4.2 Introduction of findings, analysis and discussion

As refer above the present study specify to understand the role of Micro finance in the development of Micro-business. In order to examine topic deeply, relevant literature has been talk about in the previous chapter. In addition to understand the practicalities associated with it a case study on different people who have used Micro finance in their business either for establishing or developing or protecting it has been executed.

The literature review discussed different opinions of various authors on the

topics of Micro business, Micro Financing, MFI in developing countries in

detail with surplus input from different useful sources. The above observe

topic not just examine individually, but by considering mutual application and

relevance. By studying the literature review, author comes to a conclusion

that there are different ways to examine the role of microfinance in the

development of micro business from the data obtained from micro finance

companies by considering their financing exercise. Therefore author

underline on collecting a widespread opinion on the Micro financing and their

impact on Micro businesses.

Details

The eight clients/customers have been coded by the alphabets A-H in the

further analysis to cater the identity protection and avoid any confusion. The

8 respondents belong to two different categories:

A to E – Customers of Cashpor Microfinance company F, G, H – Randomly selected Micro financing customers.

Along with the customers one of the managers at Cashpor Microfinance

Company has also been interviewed to understand the other perspective of

the Microfinancing from the providers point of view.

Having mentioned the findings of both Cashpor and random customers and

analysing them, they would further be discussed in comparision with each

other in the light of literature reviewed.

44

4.3 FINDINGS (Cashpor)

Findings of interviews conducted on the customers of Cashpor are discussed below, separately for each question.

In interview general question were asked with an aim to extract the intended information.

QUESTIONS SUPPORTING QUESTIONS

1. Tell me about your Microbusiness

What does your Microbusiness deal

in?

When did u start it?

Did you start it using Cashpor’s

financing?

Did you receive any support from

Cashpor in setting up the business?

(Non-financial)

2. How was the Microfinancing?

How did you use the money financed

by Cashpor?

How much of loan did you receive?

Did you use it completely for one

purpose?

Was there any monitoring on how

you used the funds by Cashpor

employee?

Any risks involved in it?

3. Impact of Microfinance on your business

Has the financing helped you?

Are the interest rates suitable for

your business growth?

Is the instalment affordable to pay

weekly?

Effective features of Microfinancing

45

How can the Microfinancing be

made better?

QUESTION – 1

After noting the customer’s contact detail and name, the first question asked

was about the ‘general information on microbusiness’

Q1. Tell me about your Microbusiness

What does your Microbusiness deal in?

The findings for the Microbusiness bring out the following information

CUSTOMER A B C D E

TYPE AgricultureAnimal

HusbandaryTailoring Production Retail outlet

When did u start it?

CUSTOMER

YEARA B C D E

Establish 2000 2003 2007 2009 2008

Started using

Microfinance2007 2008 2007 2009 2008

Did you start it using Cashpor’s financing?

As indicated in the above table as a summary of the year in which the

customers started using the funds from Microfinance, A and B had taken

up financing from Cashpor much later, while C, D and E had started the

Microbusiness with it.

46

Did you receive any support from Cashpor in setting up the

business? (Non-financial)

A and B stood out in this as they did not need any support from Cashpor

except the finances, while C and D took help from the Cashpro for guiding

them to utilize the finances effectively. E had asked for help to set up her

retail outlet but due to the delay she had to arrange for her own resources

to execute it.

QUESTION – 2

Q2. How was the Microfinancing?

How much of loan did you receive?

Customer A B C D E

Loan

Sanctioned

(in Rupees)

6000 4500 5000 3000 3500

How did you use the money financed by Cashpor?

‘A’ used major portion of the amount to buy a new electric motor pump for

pumping water effectively into the fields and the rest of it for buying seeds

for sowing.

B needed the money to purchase cattle to supplement the one that died

due to a disease and for the medical check up of other cattle as well.

C used it mainly for purchasing a sewing machine and its accessories and

kept a bit spare for buying cloth for tailoring needs.

D procured a bottle cap straightening machine/tool that can be operated

manually to straighten the caps of soft drink bottles.

E used it for various purposes like setting up a retail outlet, procuring

goods and a packet sealing machine.

47

Was there any monitoring on how you used the funds by Cashpor

employee?

Majority of the respondents agreed to the fact that there was barely any

monitoring on behalf of the Cashpor as long as they were receiving the

weekly instalments on time, except for B who felt that there was a frequent

concern shown by the field person towards the health of the cattle and the

revenue from them.

Any risks involved in it?

All the Cashpor customers unanimously agreed that the biggest risk was

from the assurance of consistent revenue generation and the subsequent

repayment of the weekly instalments.

QUESTION – 3

Q3. Impact of Microfinance on your business

Has the financing helped you?

All of them agreed that the Microfinance has been of immense help to

them and their families as it has help them either grow their existing

business or setup a Microbusiness successfully and obtain means of living

from it.

Are the interest rates suitable for your business growth

Though the answer was as expected that the lesser the interest rate the

better it would have been, but the intention of the author was to get an

idea of the awareness of the customers about the business and the

interest rates.

C particularly showed keenness on the interest rates and felt that the

instalments to be paid were not only due to the high interest rates but also

due to the amount borrowed as the instalments covered both the principle

and the interest.

There were reflections of the fact that high interest rates definitely

dampened the rate of their business growth along with other factors.

48

Is the instalment affordable to pay weekly

There were mixed reactions to it as few of them felt that they are not really

concerned about the instalments as they have at least procured a source

of living to start with and are able to sustain. They also felt that since it was

weekly, it was easy to save in small amounts and does not actually have a

significant impact.

There were also some concerns expressed especially by A and C as the

source of income was not consistent for them and wished the interest

rates/instalments were lesser so that they could afford to pay it with ease.

A felt if it would have been quarterly or monthly payments it would have

made her life easy.

Effective features of Microfinancing

They coherently indicated that no collateral, quick dispersal of the loan,

door step service of collection and over all assistance were the

significantly effective features of Microfinancing.

How can the Microfinancing be made better?

A and C reinstated on the flexibility of repayment of the loan, i.e. to give

the option of repayment in quarterly or monthly instalments to make Micro

financing better.

While all of them agreed that reduced interest rates would definitely be an

added advantage.

4.4 ANALYSIS (Cashpor)

Introduction

The above part details the findings obtained by interviewing the random

customers of Cashpor. Interviews conducted on 5 customers have been

illustrated above.

During interview above mention information is gathered by the author, which

shall be examine with respect to view of various aspect in relation to the

subject of the study. After examination of the information, author would

49

discuss it against the literature review compiled in the chapter 2, under the

heading of ‘Discussion’

Q1. Tell me about your Microbusiness

What does your Microbusiness deal in?

There is a wide range of distinct businesses financed by the Cashpor from

Agriculture to Production and Animal husbandary to tailoring. This

indicates that irrespective of the type of Micro business Microfinance could

be effectively used.

When did u start it?

Most of the Micro businesses were set up in the just preceding decade. C,

D and E have in fact used the Micro financing from Cashpor to setup their

Micro business. A and B had started it already but had to procure loan to

support/better their ongoing venture. This indicates with the available

platform to procure loans and the awareness of it has enabled C,D and E

to actually use the resources to establish their Micro business while A and

B did not have the access to it when they started.

Did you start it using Cashpor’s financing?

As indicated the customers started using the funds from Microfinance, A

and B had taken up financing from Cashpor much later, while C, D and E

had started the Microbusiness with it. Opportunity to procure loans through

Micro finance and the awareness of it has enabled C,D and E to actually

use the resources to establish their Micro business while A and B did not

have the access to it when they started.

QUESTION – 2

Q2. How was the Microfinancing?

How much of loan did you receive?50

The range of loan disbursed by Cashpor falls between Rs.2000 and

Rs.8000 and has been granted to the customers as per their requirement

and eligibility. The eligibility criteria is finalised based on a specific index

followed by Cashpor as discussed in the introduction of the company.

How did you use the money financed by Cashpor?

According to the individual requirements, the funds financed by Cashpor

were used distinctly. While few used it to procure the direct necessities

others used it even for the supplementary resources and for future

purchases as well.

Was there any monitoring on how you used the funds by Cashpor

employee?

There was hardly any monitoring witnessed on behalf of the Cashpor as

the only concern the company is expected to have is about receiving the

weekly instalments on time, except in case of B where the field person

enquired the health of the cattle and the revenue from them. The reason

behind it could be associated to the fact that others were into a business

that was more or less safe where as B was into perishable entities whose

mortality could scrap the business. And on their death there would be

hardly anything that Cashpor could grab or resell to get back its

investment, unlike in case of C the tailoring machine would still be of some

yield even if C was not able to stick on to the instalments.

Any risks involved in it?

All the Cashpor customers unanimously agreed that the biggest risk was

from the assurance of consistent revenue generation and the subsequent

repayment of the weekly instalments. This risk was more apparent for the

Cashpor company rather than the customers in terms of money but if we

consider their livelihood, the risk poises out evenly for both the parties.

QUESTION – 3

Q3. Impact of Microfinance on your business

51

Most of the supporting questions in this context have been mostly

analysed in the findings part hence could be discussed in regards with the

literature in the section of Discussion.

4.5 FINDINGS OF RANDOMLY SELECTED MFIs

Findings of interviews conducted on randomly selected customers who have not derived financing from Cashpor Micro finance are discussed below, separately for each question.

In interview general question were asked with an aim to extract the intended

information.

QUESTIONS SUPPORTING QUESTIONS

1. Tell me about your

Microbusiness

What does your Microbusiness deal

in?

When did u start it?

Which mode of financing did you use

for start up?

Did you receive any support from the

MFI for setting up the business?

(Non-financial)

2. How was the

Microfinancing?

How did you use the money financed

by the MFI?

How much of loan did you receive?

Did you use it completely for one

purpose?

Was there any monitoring on how

you used the funds by the MFI?

Any risks involved in it?

3. Impact of Microfinance on

your business

Has the financing helped you?

Are the interest rates suitable for

52

your business growth?

Is the instalment affordable to pay

weekly?

Effective features of Microfinancing

How can the Microfinancing be

made better?

QUESTION – 1

After noting the customer’s contact detail and name, the first question asked

was about the ‘general information on microbusiness’.

Q1. Tell me about your Microbusiness

What does your Microbusiness deal in?

The findings for the Microbusiness revealed the following information

CUSTOMER F G H

TYPE Flour mill centre

Woolen

Garments’

Knitting and

sales

Tiffin centre

53

When did u start it?

CUSTOMER

YEARF G H

Establish 2002 2005 2008

Started using Microfinance

2002 2007 2008

Did you start it using MFI’s financing?

The above table illustrates the year in which the customers started using

the funds from Micro finance, G had taken up financing from MFI 2 years

later, while F and H had started the Micro business with it.

Did you receive any support from MFI in setting up the business?

(Non-financial)

There was hardly any support offered by the MFI other than the finances.

Only some reference and guidance for procuring the equipment or for

finding the place to set up the business was offered. But later it was

realised that they were deriving commission for it and there was no

discount or benefit for the customers eventually.

QUESTION – 2

Q2. How was the Micro-financing?

How much of loan did you receive?

54

Customer F G H

Loan

Sanctioned

(in Rupees)

8000 3500 5000

How did you use the money financed by MFI?

F needed the money to purchase the Flour mill and set it up too.

G used it mainly for buying wool for knitting and also the packaging

material for selling.

H used it for various purposes like setting up a Tiffin centre, procuring raw

material for cooking and other arrangements.

Was there any monitoring on how you used the funds by MFI

employee?

“The MFI agents are only interested in the weekly instalments that we pay.

They do not want to know where it comes from” was said by G and similar

comments were made by F and H as well.

Any risks involved in it?

F, G and H agreed that the biggest risk was the lack of assured consistent

revenue and the subsequent repayment of the weekly instalments.

QUESTION – 3

Q3. Impact of Microfinance on your business

Has the financing helped you?

Though F, G and H said that it has definitely helped them sustain their

living, it has also bonded them into a long term debt which does not give

them an opportunity to save and hence forces them to reapply for another

loan on completion, even for small additional needs.

Are the interest rates suitable for your business growth

It was an expected reply that the lesser the interest rate the better it would

be, not only for the development of business, whereas it would help them

to make a better living. This was particularly expressed by G.

Is the instalment affordable to pay weekly

55

F, H had little problems in paying the weekly instalments as they had a

consistent source of income but G was showing no signs of happiness

with the rigidity of the instalments to be paid weekly as her business was

seasonal and was difficult for her to pay the instalments during the off

season.

Effective features of Microfinancing

No collateral was one aspect commonly indicated by all the three

customers. Quick dispersal of the loan as a good features of

Microfinancing was felt by H.

How can the Microfinancing be made better?

G was specifically interested in the flexibility of repayment of the loan, i.e.

to give the option of repayment in quarterly or half-yearly instalments to

make Micro financing better.

Additional support from the MFI’s in terms of not only setting up the

business but also in the guidance of business process would definitely be

an added advantage.

4.6 ANALYSIS OF RANDOMLY SELECTED MFIs)

Introduction

The findings derived by interviewing the 3 random customers of MFI are

detailed above.

During interview above mention information is gathered by the author, which

shall be examine with respect to view of various aspect in relation to the

subject of the study. After examination of the information, author would

discuss it against the literature review compiled in the chapter 2, under the

heading of ‘Discussion’.

Q1. Tell me about your Microbusiness

What does your Microbusiness deal in?

56

F had set her Micro business up by purchasing a Flour mill through the

financing received by MFI. This could be measured as one of the ideal

ways of optimally using the micro financing.

G had a bit of different approach towards her business as she used to knit

woollen garments and supply it to a seller and get minimum wages out of

it. But to fight back the losses that she felt she suffered due to being

isolated from the market, she decided to do all the purchasing of raw

material(wool, needles, etc.), knitting and sales all by herself and

confident of her approach, she went on to use Micro financing to do all

this.

H was into cooking and felt that she could set her own Tiffin centre up with

minimal financial support that she was able to procure from MFI

introduced to her by her neighbour.

When did you start it & did you start it using MFI’s financing?

It could be observed that all the micro businesses considered here have

been set up in the last decade indicating the increasing spread of the

Micro financing and its awareness.

F and H needed significant funds to start a micro business as the former

needed a flour machine while the later had to gather resources and find a

place to start her Tiffin centre.

And in either cases they were not self sufficient to cater to the financial

needs of starting those ventures. Though G was already in to the work for

2 years, she opted to use the facility of Micro financing and set her own

micro business later.

QUESTION – 2

Q2. How was the Microfinancing?

How much of loan did you receive?

57

So far in the case study, it is F who could get the benefit of being

sanctioned with the maximum allowance of Rs. 8000 by an MFI. G and H

received amounts of Rs.3500 and Rs.5000 respectively as per their

necessity and the eligibility criteria set by the MFI.

How did you use the money financed by MFI?

The money financed by the MFI was used by different customers

differently either to purchase the equipment, set up the place and furniture

or to purchase the raw materials for the production of garments. Either

ways the focus of interest is that there has been effective utilization of the

financing by the MFI’s to develop the micro business.

Was there any monitoring on how you used the funds by MFI

employee?

This is probably one area that MFI’s are lacking in or may be that they do

not really care as long as their intention of deriving profits out of the

regular instalments is fulfilled. One of the customers expressed that

‘Obviously no one is going to use funds on such high interest either for

saving at home or for any irrelevant purpose. And even if they do the MFI’s

should not have any problem as long as they are receiving the timely

instalments’ which is absolutely right.

Any risks involved in it?

The biggest risk felt by the customers was about the inconsistent revenue

generation or off-season periods of sale and failure in the subsequent

repayment of the weekly instalments. Risk also extends not only to the

individuals but also to their immediate families as in case of any adversity,

it is the responsibility of the family to repay the instalments.

QUESTION – 3

58

Q3. Impact of Microfinance on your business

The supporting questions in this context have been mostly examined in the

findings part hence would be further discussed in relevance to the

literature in the following section of Discussion.

4.7 DISCUSSION OF FINDING AND ANALYSIS

Introduction

Researcher prefer to talk about the analysis against the literature review of

the present topic in the present section through the findings derived by

interviewing the random customers financed by the MFI’s (including

Cashpor ) in Eastern region of Uttar Pradesh (India).

The argument would be for the main questions and their subsequent

outcomes in the analysis and appropriate evidence of the relevant text found

in the literature review.

Details of Microbusiness:

In the process of enquiring the details of the Microbusiness author also

gathered information regarding other aspects associated with the

business and the interviewee’s so as to probe further into the nature and

mode of business and their requirements and make an attempt to critically

evaluate it in comparison with the literature and contrasting it.

Spotting a similar correlation between the proposed theory of Frank which

states that ‘with the growth of firm or by learning rapidly through

experience i.e from unskilled entrepreneur to skilled entrepreneur,

changes her/his behaviour which in turn helps them to make realistic

approach on how to run the business’ and comparing it to one of the

customers, i.e. G, who started working as a worker at a knitting company

but with the availability of the opportunity for micro financing, took a

realistic approach and started running her own business. This might not

be true to the literal meaning but still conveys the essence.

59

Arguably in contrast to Humphries (1997), who believes that ‘with the

increase of micro business largely effect on the development of SMEs,

whereas it also play a role in growth of self employment specially for

those whom second job is ‘self-employment’, the interview revealed that it

was not true and that people have taken up micro businesses or self

employment due to their need of survival and not as the second job.

The view of Langdon (2001) on self employment is note worth which

illustrates that

‘The term micro business does not be used as synonym for self

employment because director of a firm is not self-employed and confronts

myriad of various issues’. This concept is worth considering, especially in

the current essay where in all cases considered are treated as micro

businesses even without actually evaluating them to qualify for being

called so.

Author believes that Micro business must be classified as that business

that at least has 2 to 3 people working in it headed by either the owner or

the manager. Business involves management of resources including men.

As cited by Cromie et al (1999) that about 75 percent of all business

constituent in the economy are family businesses and complimenting the

same it has been observed that most of these women who have

subscribed to micro business involve their families in one way or the other

and gradually form a part of it. Like for example G’s brother helps her in

packaging and transportation of the knitted woolen garments where as

her uncle markets and sells them in a different region. Similarly E’s

husband helps her in getting the commodities from the wholesaler and H

and her husband along with their son run the Tiffin centre.

Microfinancing and MFI’s

Author has noted that all or at least in majority of the cases, Micro

financing has been instrumental in inspiring people to take up Self

employment or micro business so as to support themselves and their

families. The same has been observed in the literature which supports the

fact that ‘typically the customers of micro finance are people living just

60

above or below poverty line and they do not have any access to formal

financial institutions and are generally self employed, domestic

entrepreneurs. If we look at the rural areas, the large number of

customers of micro finance are mainly Small farmers and people engaged

in small income generating activities like petty trade , food process etc.

One aspect that has always been ignored about the MFI’s is the savings

part of it. MFI’s have never been considered as a place to save, but it

tends to remain a hidden fact. Contrastingly it can be questioned that are

the circumstances generated by the MFI’s feasible enough to give the

opportunity for the debtors to actually save any money. Due to the high

interest rates, as mentioned by one of the interviewees, there is hardly

any scope for saving after fulfilling the basic requirements and the

business needs and after the completion of the instalments term, some

situation arises which forces them to take another loan to cater to it.

Apart from the financial needs, they do not receive any additional support

as in terms of the guidance to proper utilization of the finances or the

available resources. Though this is not a mandatory service, but would be

appreciated and an added advantage especially to the rural poor who do

not have access to information.

Impact of Microfinance on Microbusiness

Most of the interviewees have the same opinion regarding the role of

micro finance that there was considerable yet positive impact on micro

business, whereas few reflected that there exist both negative and

positive effects. Among the 8 customers who were interviewed, one

customer felt that it entirely dependent on individual and their business

how to utilise resources, especially the finances in this case. Among

many other factors, the frequency of the instalments was a major area of

concern for few of them who were operating businesses of inconsistent

nature which had on and off seasons and lacked income on a regular

basis. It was also reflected by those who had fluctuating incomes and had

to poise it as and when required. The interest rates stand out to be

another important feature that is very vulnerable to be commented on.

The only option that could be exercised to better this segment of high

61

interest rates is to bring in the phenomenon of external control, preferably

by the government or a cluster of self-organised bodies of MFI who agree

to set certain cap on the interest rates to be charged for the betterment of

the people they offer custom to. If this could be adhered then it would

definitely make a positive impact on the micro businesses and aid in their

development.

On the other side in spite of the fact that though the charged interest rate is

high by micro financing institution, to cover their cost of loan, but this

interest rate are far below to what poor people pay to village money

lenders.This needs to be taken into the consideration as well.

There are few other reasons that were found which manipulate the

development of micro businesses because of the financial help offered by

the MFI’s. These could be the non collateral loans, organised repayment

plan that helps them to plan their savings and spending, door step service,

transparency in the interest charged, etc.,

Beside from these ease of handling, complexity, reduced human efforts,

absence of trickery could be witnessed with the MFI’s in most of the cases.

Creativity is one aspect that has not been highlighted earlier but is a major

factor that has surfaced not only in the urban poor but also in the rural

areas due to the encouragement and courage given by the financial

assistance of the MFI’s.

In respect to previous discussion not though with direct reference in

conjunction with literature review, bringing the coherence of the theory in

align with practice. The theories discussed above have difference relevance

to different customers as per the level making sure that their reflection of

each individual situation and circumstances with business conditions.

4.8 Conclusion of Findings, Analysis and Discussion

This part of the subject will talk about the study analysed and researched by

the researcher in the sections preceding this one. First of all the finding were

put in place as it would have been told to the writer that the interview. But

62

most interesting fact and figure that has come to the light while at the same

time it has been evaluated and analysed in the part discussed later pages of

analysis.

It can be concluded from analysis that the people without the access to

funds for supporting their livelihood were still able to sustain and grow even

in their business due to the support offered by the MFI’s. Apart from the

frequency of instalments and the high level of interest rates the customers of

MFI did not express any major concerns.  This will ultimately lead to

discussion where in it was compared and contrasted in line with topic

discussed in the liteturature review of the previous chapter and astonishingly

it can be finalised that there has been lots of disagreements between the

finding of this study and the contents of literature review.

Chapter 5

5.1 CONCLUSIONS

MFI’s continually have been underpinning the growth of Micro business and

consequently the development of economy of nation by economic up-liftment

of BPL people from rural areas and by generating employment opportunities

for them. Development of Micro business was steered by the ingenuity

showed by the people in rural areas due to the support received from the

Micro Finance companies.

Considering Micro finance’s role in growth of micro business & aiming the

research towards the developing countries, in this case India, a systematic

and strong research was conducted. Research was done in eastern region of

Uttar Pradesh (India) by randomly picking 8 customers, 5 of Cash poor

Microfinance and 3 of other MFI’s, while ensuring that a broad variety is

present for interview. It can be inferred from the analysis &findings that there

has been a considerable effect of Micro finance on the development of Micro

business in the region.

Following aspects have been reviewed under that study:

63

Investigation of Microfinance and its outreach to the eligible and needy

BPL people in their effort for sustenance though development of Micro

business.

Various aspects of Micro business and their features have been

thoroughly studied

A rigorous review of the appropriate literature related to Micro finance

has been conducted and as well considered its applications.

For the research, a case-study was done on the MFIs based in

eastern region of Uttar Pradesh (India) to examine the role of

Microfinance on development of micro business.

The extract of the research yielded from the findings of interview and

further compared with the literature & try to find out the similarities &

contrasts in them.

It has been observed from the interviews that a considerable majority

have felt a strong need for an additional non-financial support from the

MFI’s in start-up and development of their business, which is found to

be lacking presently.

The vulnerable issue of high interest rates needs to be resolved

considering both the MFI’s and the customers.

5.2 Considerations

The considerations of the case-study are:

The sample taken was relatively small, only 8 interviewees were

examined. The conclusions were based on structured interview arranged

between the author & the customers.

A sample that had a broad variety of contestant was selected thought the

process is mentioned to be random so as to achieve a systematic

investigation outcome.

Only the perspective of the customers of MFI has been considered and

the other side, i.e. MFI’s had to be dropped.

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Author established that the participants in the beginning were doubtful about

sharing their identities due to security reasons until the time they were

informed about the identity protection. Once assured about the protection

they expressed their thoughts & experiences happily.

5.3 Implications

In literature review different factors linked with Micro finance and Micro

business have been thoroughly studied. It has been found that Microfinance

has made some astounding advances in the last ten years and has now

become a worldwide movement. Its core vision of establishing access of

finances to all is underway because of its fast progress. Various potential

players like commercial banks, non-financial retailers and technology related

companies are bound to play an important role by forming alliances to

reinvent and give a proactive approach to microfinance in the next decade.

The response has been observed to be strongly coming from many quarters

not only for seeking help but also to contribute. NGOs and other institutions

which were initially responsible for the birth of microfinance will have now

modernised and updated themselves in order to continue their contribution in

the following stages. These institutions will have research undiscovered

areas by commercial players in depth and create a social impact. All the

parties concerned in microfinance will have to expand and broaden their

views as well as visions to create exciting future possibilities. Microfinance

should be given a place in the Millenium Development Goals so that all the

nations address humanity based issues like peace, security, democracy,

governance, poverty and environment under the coordination of the United

States. This has been appreciated in the UN Millennium Declarations were

the micro finance projects that meet domestic community priorities to

eradicate poverty.

From this angle, microfinance is the best option to deal in removing poverty

and becomes a vital part in accomplishing millennium development goal

2020.

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This assertion places high pressure on microfinance in deal with the

challenges & to grab the opportunities of next decade so that by 2020 it will

have realized the vision of assuring access to financial services to majority of

the world that has been striving long for it.

5.4 Further research

Due to being time bound author had to limit himself to these samples and

findings. There is a vast scope of further investigate regarding the opinions of

the people reforming the businesses activity and further probe into what their

needs are and do they vary with region and other facets. The successful

functioning of these Micro businesses is also an issue on the completion of

their repayment and to what extent these turn out to be ventures for life and

livelihood of the poor.

Apart from the MFI’s there are other ways that need to be explored through

which the needy are benefited by the Microfinance, such as the Self Help

Groups. The encouragement provided to them also needs to be evaluated

and their role could also be analysed. Government intervention in

Microfinance has not been actually highlighted significantly and that area

could also be probed to explore the possibilities of further assistance and

development. Possible assistance from the urban areas towards the

development of Micro businesses by outsourcing mini projects or some tie

ups for marketing could also be an area to be explored.

It also is a matter of interest whether the same circumstances do exist in the

developed countries and what are the opportunities for the better utilization of

Micro finance there.

5.5 Recommendation

Having thoroughly researched the topic of Microfinance and its effect on the

development of micro business, author recommends that though there is a

substantial yet positive impact on the micro businesses, still there exists a

huge scope for improvement not only on the front of micro finance but also in

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development of effective micro businesses and efficient utilization of the

funds made available through micro finance.

Certain areas where amendments are desired by the people BPL for availing

and effective repayment of the micro finance are the frequency of instalments

which are not often with in the scope of their repayment budget in that

particular period. Hence adopting certain flexibility by the MFI could make a

considerable aid for the MFI customers.

Saving is the neglected sister of Micro credits and must be emphasised to

improve and encourage the savings by poor and hence improve the cash

flows. A cap on interest rates by means of government intervention would

prove to be a effective yet positive move to strengthen and broaden the effect

of micro finance on the development of micro business.

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