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ENABLING MODELS OF MICROFINANCE: PRAXIS AND LESSONS
H.S. Shylendra

Introduction
Microfinance which has emerged in the recent decades as a popular and a widespread phenomenon has evoked strong responses in the discourse which are either supportive or derisive of its role and the manner of delivery. About its role, those supportive identify it as a powerful tool with a potential to end poverty. Easy access to credit which microfinance interventions ensure is believed to help poor tap economic opportunities widely available in the unorganized sector. Those critical of microfinance have argued that the claims about microfinance are almost evangelical bereft of clear understanding about ways of ending poverty and inequality. Equally contested are the arguments over the manner of delivery of microfinance. The arguments here indicate a major schism that exists over the issue of balancing the apparently contradictory objectives of outreach and sustainability in microfinance. In this regard, there are some who are keen to integrate microfinance with the mainstream financial system and want the microfinance interventions to assume proper form different from civil society origins so that they can attain the much needed efficiency to scale-up and be sustainable. Microfinance interventions are suggested to shun subsidies and be on their own through cost recovery, even if it means charging higher rates of interest, excluding very poor, and be minimalist in the delivery of financial services. The contrary view is that microfinance cannot be fully diverged from its civil society moorings and that poor have to be reached out proactively through appropriate subsidies and a more integrated approach in delivery.
Despite mixed evidence about the role of MF and the efficacy of different delivery methods, the prevailing scenario, however, depicts dominance of the school advocating financial and commercial orientation both in theory and praxis. The dominance would have been complete but for a series of failures encountered by microfinance institutions (MFIs) following such an approach in India and elsewhere. MFIs following commercial approach have come under serious scrutiny of policy makers, regulatory authorities and vigilante groups over their practices of charging high interest rates, rigid and coercive repayment norms, and excessive profit orientation resulting in an increased debt burden for the poor. These MF interventions have been even criticised for ignoring the primary developmental concerns for which microfinance originated. These limitations of microfinance have given raise for serious thoughts on ways reforming it. A few even argue that microfinance can never succeed in its goal of inclusion and poverty alleviation given its inherent contradictions. Others would like microfinance to regain the lost ground both in terms of its purpose and approach through certain reforms. They are arguing for reforms which emphasize on issues like ‘bring development back to microfinance,’ and `promote social over financial cause.’ How far and in what way these alternative methods can be incorporated in microfinance is still a moot question given their diverse nature and inadequacy of evidence over such practices. The article is based on a study carried for INAFI-India to document the emerging experiences of the microfinance interventions focusing on an alternative methods. The study was based on the case study of eight partners of INAFI-India representing diverse models spread across different regions of the country. These eight organizations included Nav Bharat Jagriti Kendra, DHAN Foundation, Shri Kshethra Dharmasthala Rural Development Project, People’s Rural Education Movement, Pragathi Seva Samithi, People’s Education and Development Organization, Shramik Bharti and BAIF Development Research Foundation. The preliminary findings of the study are summarized below.

Civil Society Background and Altruism
Essentially microfinance is the response of the civil society to issues of market and state failures in addressing the financial services needs of the poor. The cases clearly indicate the attempt made by the organizations studied to respond to the emerging need they identified while working with the poor and needy. All the promoting organizations have primarily NGO background and have come up based on their own ideological or social work concerns of working with the poor. In the course of working with their target groups, these organizations have realized the need and importance of meeting the credit needs of the poor in its own right and to complement the work they are already into. It is this need-based entry into providing access to credit is one major driving force that has created the difference in their approach to microfinance and its subsequent growth.
Another key element that goes with the above thrust in initiating microfinance is the pursuance of multiple developmental activities by these agencies along with microfinance. All of them have remained as multi-activity NGOs with range of interventions like agricultural development, natural resource management, livelihood promotion, health, education and advocacy. MF has been carried out along with other activities. The multi-activity focus has apparently given certain advantages. It has enabled these organizations to tackle poverty and other developmental challenges through a multi-dimensional approach bringing in a more integrated perspective.
Altruism is an essential characteristic of any civil society movement; profit and other self-seeking goals cannot be the primary goals. The experience of these agencies brings out the strengths displayed by them even while pursuing an intervention like microfinance which inherently poses several contradictions for a typical NGO. Despite such a challenge, these agencies have tried their best to sustain a not-for-profit approach in their microfinance interventions. In cases where the NGOs themselves have directly taken up delivery of MF, they have adopted largely the principle of operational sustainability to meet the essential costs rather than pursue the excessive surplus generation. Moreover, whatever the surplus they have generated, they have tried to either plough it back into programme or use it for other developmental interventions. Those promoting community based organizations (CBOs) for delivery have left it to the CBOs to decide the issue of profit earning based on community needs.

Delivery Models
Broadly, three types of models have emerged under MF in the Indian context. These three models can be identified as the on-lending model, the linkage model, and the enabling model. Under the on-lending model, NGOs have taken up provision of microfinance on their own mobilizing resources from donors and financial institutions. Under the linkage model, NGOs have tried to link groups promoted by them to banks and financial institutions for accessing credit, savings and insurance services. Under the enabling models, NGOs have tried to promote CBOs which can take up financial intermediation role on their own.
The assessment based on the cases reveals that the organizations studied have adopted some combination of these models in trying to deliver MF. Most of the organizations have tried to promote enabling models with a window for linkage model. The enabling model has been attempted mainly by way of creation of CBOs either in the form of federation of SHGs or member-based cooperatives.
Two key drivers could be identified having an influence in the creation such enabling models. These organizations consider that promotion of CBOs can be greatly empowering for the communities. Secondly, it also provides easy scope for NGO withdrawal. The enabling models also combine elements of linkage model giving scope for diversified approach to financial intermediation by these CBOs. One more dimension in this regard is the recent emergence of agency model for insurance services. Most of these organizations have attempted incorporation of micro-insurance in partnership with insurance companies. Here again as per the prominent model being practiced, the organizations have either on their own taken up the agency role or allowed the CBOs to take up delivery of micro-insurance.
Group-based Microfinance
A common approach discernable across the cases is the group based delivery of microfinance. The case studies reveal attempts by the organizations to adopt and innovate with groups including integrating them at higher levels to reap benefits of collective action. SHGs are the prominent types of groups that are being promoted by these organizations. Partly, this is attributable to the launch of SHG bank linkage programme and the support that is available to the formation and nurturing of SHGs. The interventions have followed certain commonly advocated principles in building SHGs like homogeneity of membership, self-selection in member enrollment, framing of own rules, self-management, and rotational leadership. Relevant capacity building efforts have been made through training and exposure visits. The groups are being involved in assessing loan needs, monitoring loan use and repayment, pooling savings to build own resources and to leverage for external support. SHGs are also being used as channels for discussing other social issues and delivering other development schemes.
Further, a clear attempt to integrate SHGs at a higher level can be seen in almost all cases. SHGs have been brought together at local level with further integration at block or district level in the form of formal CBOs. The promotion of such collectives itself can be seen as a major achievement of these organizations. These higher level organizations are emerging as autonomous agencies to take up financial intermediation and other roles.
Outreach and Services
In terms of coverage, while all the organizations have focused prominently in targeting the needy in rural areas, many have identified the need to work with the poor in urban areas also. Tribals, dalits, small and marginal farmers, laborers, and artisans are the major disadvantaged groups targeted by these agencies. A common denominator has been reaching out to women by all them, especially under their microfinance programmes. In fact some are even carrying out microfinance as women development programme.
About the scale of operations a mixed picture emerges. All the organizations studied are multi-activity NGOs. The extent of outreach under microfinance has been determined to a significant extent by the outreach and jurisdiction of their primary programmes. Though, overall scenario from the cases depicts moderate level of achievement , a few strengths of such an outreach needs to be identified. The composition of the outreach is one of needy and disadvantaged groups. At the same time, there is an attempt to build quality groups. Moreover, the tagging of microfinance outreach to the primary programmes is helping in combining credit with other developmental assistance. No doubt some of the organizations have faced constraints in terms of resources and professional capacities for scaling up, apparently a restrained approach has been adopted instead of expanding at any cost.

In terms microfinance services, to the extent possible the organizations have attempted to ensure all the key concerns of service delivery like diversity, accessibility, and affordability. One common service that is offered by all organizations is promoting group level savings as per the capacity of the local members. The members are encouraged to save regularly in small amounts to enable the group members to build-up own resources to pursue internal lending for emergency purposes and to leverage of accessing external funds. Credit is another prominent service being offered. Across all cases, groups are resorting to internal lending to meet small and emergency needs of members based on their savings. The groups are considering this as an important achievement. Groups are able to earn some returns on this activity by charging interest. In terms of external loans wide variations can be seen in the loans offered across organisations. Diverse and bigger loans are being delivered by those organizations which have enabled access to larger resources Further, combining multiple models have helped groups and members to tap multiple sources of loans like SHGs, Federations and banks.

Coming to the key issues of rate of interest and repayment methods, the practices indicate prevalence of diverse scenario. About rate of interest, the organizations have tried to give their best given several constraints. The bank linkage models have offered relatively lower rates than others given the cheaper access provided by the banks. The on-lending and enabling models have a mixed scenario. The enabling models have in many cases left it to the wisdom of members to decide about rates of interest based on the demand and other local consideration. About loan recovery, while all the interventions have shown overall good recovery, a common positive feature noticeable is the absence of coercive methods both in lending and recovery. This is attributable largely to the adoption of need based microfinance rather than one driven by commercial considerations.

Credit-Plus Services
Delivery of credit-plus services is a challenging task as it needs an integrated perspective. The cases indicate to a scenario where in sincere efforts being made to establish linkages between microfinance and other services needed by the members. Though the extent of coverage is limited, but some of the initiatives throw up useful insights into the issue of linkage. As multi-activity NGOs, the organizations are pursuing variety of activities which are also targeted at microfinance groups. In this way, the developmental interventions and microfinance are being combined for integrated delivery and impact.

Besides, there are attempts to provide additional services needed by the microfinance participants to make better use of their credit. A common service seen across the organizations is the provision of training to the members of the groups pertaining to SHG management and income generating activities. Simultaneously, many of these organizations are trying to arrange support services for book-keeping and auditing of SHGs on payment basis. Linkages are being established to enable SHGs to pursue livelihood improvement activities health awareness, PDS and mid-day meal schemes. A few organisations have made efforts to set up specialized institutions to provide livelihood improvement services and linkages. Though such examples are limited but are pointer to the possibilities that exist for integrated development when the needed perspective is present.

Constraints
Constraints of various nature are experienced when organizations try and deliver microfinance combining developmental focus. Though challenges have varied across different models, some prominent ones highlighted here. For those following the enabling model, a major constraints has been identifying an appropriate legal form for promoting CBO. There are variations in the legal forms adopted. While some have adopted NGO form (trust or society) for promoting CBOs, others have followed cooperative form. Though diversity may be useful but NGO forms have certain constraints in ensuring proper ownership and control by members. At the same time, needed resources to help develop the capacities of these CBOs have not been easily forthcoming. For the linkage model the response and support of the banks and financial institutions have been of a varying type bringing uncertainty in sustaining the linkage.

The delivery models in the NGO form have also faced few constraints. There is the eternal dilemma of providing credit services by a charitable institution. The need by poor and the acuteness of the exclusion problem has compelled them to take up the activity. Second is the regulatory challenge more so about savings and insurance. Regulatory provisions have made them fragment or curtail their savings and insurance services. A key issue observed is wide variations in the interest rate on loans across these interventions. In certain cases, they are relatively high by formal standards having implications for affordability. Lack of availability of cheaper funds for lending to poor is the key constraint. About collateral, though some of the organizations are offering larger loans, collateral is being insisted highlighting the limitation of group method.

Implications
The study very clearly brings out the relevance of enabling models of microfinance. Enabling models provide several advantages. By bringing community issues to the fore they help resolve to a great extent many contradictions that go with microfinance. The community based structures when orgnised well bring in additional advantage through their ability to mobilize resources for effective financial intermediation and for pursuing other developmental activities. Enabling models make these happen in a much more decentralized and participatory way.

The second major lesson that emerges is the continued relevance of NGOs and other civil society agencies for microfinance. The role for NGOs remains important both for financial and social intermediation as long as financial exclusion persists. Developmental NGOs with multi-activity focus can help bring the needed links between microfinance and other area. Continued involvement of NGOs is also useful for social intermediation process of promoting and nurturing groups and community based organizations. Given the reality that NGOs are playing a significant role in delivering financial services for the poor, there is a need to clarify their regulatory positions more clearly. Further, social intermediation by way of formation of groups and CBOs needs considerable resources. State, banks and other public agencies must make investment here. State must also ensure the availability of adequate cheaper funds to meet the loan fund needs of the microfinance sector. These measure can help microfinance become more social and wholistic.
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The author can be contacted : Email id: hss@irma.ac.in