Unit 5: Microfinance and SHGs
Concept of Microfinance
Microfinance refers to the provision of small-scale financial services to low-income individuals or groups who are typically excluded from the traditional banking system.
It is not just about loans, but a bundle of services:
- Micro-credit: Small loans (e.g., ₹5,000 - ₹50,000) for income-generating activities.
- Micro-savings: Allowing people to save very small amounts of money securely.
- Micro-insurance: Providing insurance (health, life, livestock) at a low premium.
- Remittances: Facilitating the transfer of money.
The core idea, pioneered by figures like Muhammad Yunus (founder of Grameen Bank), is that the poor are creditworthy and that access to small amounts of capital can allow them to break the cycle of poverty by starting their own small businesses.
Entrepreneurship Development by Microfinance
Microfinance is a direct tool for fostering grassroots entrepreneurship. It addresses the number one barrier for the poor: lack of capital.
- Enabling "Micro-Entrepreneurs": A small loan can allow a person to buy a sewing machine, a vegetable cart, livestock, or raw materials. This enables them to start an "income-generating activity," making them a micro-entrepreneur.
- Financial Inclusion: By providing access to formal financial services, microfinance brings people into the mainstream economy, giving them the tools to manage their finances, build assets, and grow their small businesses.
- Building Business Skills: Many microfinance programs are bundled with mandatory training in basic financial literacy, bookkeeping, and business management.
- Creating a Virtuous Cycle: The entrepreneur earns income, repays the loan, gains a credit history, and then becomes eligible for a slightly larger loan, allowing their business to grow.
Formation and Role of SHG in development
Formation of a Self-Help Group (SHG)
A Self-Help Group (SHG) is a small, voluntary group of 10-20 people (usually women) from similar socio-economic backgrounds who come together to save small sums of money regularly.
How they are formed:
- A small group of neighbors or friends decide to meet regularly (e.g., weekly or monthly).
- At each meeting, every member contributes a fixed, small amount of savings (e.g., ₹20 or ₹50).
- This pooled money is maintained in a common fund.
- The group practices "internal lending," giving small loans to its own members for needs (consumption, health) or business (buying a goat).
- They maintain their own records and charge a small interest rate, which adds to the group's fund.
Role of SHG in Development
- Financial Discipline: It builds a culture of regular savings and responsible borrowing.
- Access to Credit: It provides a source of credit that is cheap, flexible, and available without collateral.
- Collateral Substitute: The "peer pressure" and mutual trust within the group serve as a form of social collateral, ensuring very high repayment rates (often over 98%).
- Social Platform: SHG meetings become a platform to discuss other community issues, such as health, education, and domestic violence.
Linkage of SHG and MFI
While SHGs are powerful, their internal savings are very small. To grow, they need larger funds. This is achieved through the SHG-Bank Linkage Programme.
This model connects SHGs with formal financial institutions, which can be commercial banks or Microfinance Institutions (MFIs).
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How the Linkage Works:
- An SHG operates for 6-12 months, building its own savings and a record of successful internal lending.
- A bank or MFI then appraises the SHG's performance (regularity of meetings, savings, and loan repayments).
- Finding the group to be disciplined, the MFI provides a single, larger loan to the SHG as a whole unit, without taking any physical collateral.
- The SHG then uses this larger fund to give bigger loans to its members for business expansion.
Key Benefit: This model is a win-win.
- For the MFI/Bank: It is cheap. They manage one loan account for the SHG, instead of 20 tiny accounts for individuals. Risk is very low due to peer pressure.
- For the SHG Members: They get access to larger amounts of capital from the formal banking system, which they could never get as individuals.
Women empowerment through SHGs
SHGs (which are predominantly female) are one of the most powerful tools for women's empowerment, especially in rural areas. This empowerment is multi-dimensional:
1. Economic Empowerment
- Access to Capital: Women get control over financial resources for the first time.
- Income Generation: They can start their own micro-enterprises, earning an independent income.
- Reduced Dependence: They are no longer solely dependent on their husbands or male family members for money.
- Asset Creation: They can use their income to buy assets (e.g., a cow, a small piece of land) in their own name.
2. Social Empowerment
- Mobility: Attending SHG meetings gives women a legitimate reason to leave the house, interact with others, and become more visible in the community.
- Collective Voice: As a group, they can tackle social issues (e.g., closing a local liquor shop, demanding a village water pump, or stopping child marriage).
- Confidence and Self-Esteem: Successfully managing money and running a business builds immense self-confidence.
- Skill Development: They learn financial literacy, bookkeeping, and leadership skills.
3. Political Empowerment
- Increased Participation: SHG members are more likely to vote, participate in village council (Gram Sabha) meetings, and even stand for local elections.
- Decision-Making Power: Earning an income often translates into having a greater say in household decisions (e.g., children's education, healthcare).