International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421

Volume 2, No. 4, April 2013

i-Xplore International Research Journal Consortium www.irjcjournals.org
70
Micro Credit for Sustainable Development: Role of NGOs

Manmohan Mall, Siksha O Anusandhan University, Bhubaneswar
P K Mishra, Central University of Jharkhand, Brambe, Ranchi


ABSTRACT

Microcredit has spread rapidly since its beginning in the
late 1970s, but whether and how much it helps the poor is
the subject of intense debate. As the history suggests rural
credit, poverty alleviation, and micro finance are
inextricably interwoven. Any effort to understand one
without the reference to other can give fragmented results.
The Non-Governmental Organisations (NGOs) are
regarded as outside actors perceived to work in the
interests of the poor, and in the absence of the state, many
NGOs have played a vital role in the provision of basic
services to the poor. The present paper seeks to delineate
the role of NGOs in microfinance and banking inclusion in
the remote rural areas.

Keywords
Microfinance, Sustainable Development, NGOs

I. INTRODUCTION

Poverty is one of the biggest challenges to the
development of a developing country like India where a
major population is living in rural and semi-urban areas.
Poverty leads to hunger, malnutrition, illiteracy and social
misdeeds. The main reason may be lack of ample
employment opportunities in the country. Since
employability of human resource is a key to sustainable
development, creating self-employment opportunities is
one way of alleviating poverty and solving the
consequential problems of unemployment. There are over
24 crores people anyhow sustaining below the poverty line
in the country. The Scheme of Micro-Credit has been
found as an effective instrument for lifting the perished
poor above the level of poverty by providing them
adequate self-employment opportunities and making them
credit worthy.

In the context of the contemporary social empowerment,
self realizations and self initiatives are the bases for the
formation of Self-Help Groups (SHGs). This has
motivated NGOs to form SHGs in rural areas to empower
them through developing their inherent skills. Thus, SHG
movement among the rural poor in different parts of the
country has emerged as a very reliable and efficient mode
for technology transfer. Chanakyas philosophical
statement has transformed into the SHGs with the help of
NGOs and their efforts. Microfinance is the tool to
empower the rural poor and also tool against human
deprivation. Microfinance is motivating sustainable
development through the supportive NGOs.

The growth of microfinance in India has been in response
to the failure of institutional initiatives of rural credit
system and involvement of informal credit system rural
credits especially rural cooperatives. This has led to
establishment of microfinance institutions under the
guidelines of NABARD. Micro-credit programme works
through NGOs/SHGs and the merit lies in weekly
monitoring and refund of installments.

II. GROWTH OF MICROFINANCE IN
INDIA

During the 1960s and 1970s the key issue in agriculture
and rural development was agricultural production. Apart
from improved seeds and seedlings, fertilizer, pesticides,
tools and machines agricultural credit was an input for
improved agricultural production. The target groups were
farmers and the issue was how to disburse agricultural
credit to farmers. The funds were provided by
governments and donors. Disbursement mattered, not
repayment. The main disbursement channels were
agricultural development banks and projects. Agricultural
credit was a service, not a business. The strategy had much
to show: the green revolution, driven by technology,
financed on credit, with subsidized interest rates. The
produce was purchased by government at guaranteed
prices. So green revolution succeeded thereby ignoring the
business of the financial services. But when farmers didnt
repay their loans, the banks didnt cover their costs and the
governments ran out of money to finance the subsidies, the
banking business finally failed, and so did the service.
Meanwhile, with the rapidly growing population,
increasing numbers of rural people could not live on
agriculture alone. To survive they had to engage in
numerous activities such as on-farm, off-farm and non-
farm activities. Rural households and rural economies got
increasingly diversified. Access to finance was the
limiting factor. Agricultural credit had been exclusive. It
excluded all those who didnt own and cultivate the land.
In addition to this, labourers, small and micro-
entrepreneurs, traders, women and large numbers of small-
holders were too poor to pay the bribes, and also too
uneducated to do the paperwork. The unsatisfied demand
prepared the ground for a revolution on the supply side
and microfinance took its birth. Perhaps this might have
International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421
Volume 2, No. 4, April 2013


i-Xplore International Research Journal Consortium www.irjcjournals.org
71
been called the Blue Revolution, the blue being the
bankers colour. The new emerging issue was to link
microfinance to rural entrepreneurs through inclusive
financial systems development.

Due to the overall failure of capital transfer and
government-directed credit during the 1960s and 1970s,
the emphasis on development policy shifted from targeting
bigger farmers and SMEs to inclusive finance, including
micro-entrepreneurs, women and the poorer segments of
the population; from the development banks and
subsequently from credit Non-Governmental
Organisations (NGOs) to (rural) financial system
development with a conducive policy framework and the
building of self-reliant, sustainable institutions; in rural
areas from agricultural credit to rural financial services for
a diversified economy; and from development banking to
microfinance.

Microfinance through SHGs has become a ladder for the
poor to bring them up not only economically but also
morally, socially and culturally. Initially, SHGs and
microfinance, as the instrument for social and economic
empowerment, were established by the non-governmental
organizations. In the era of 21
st
century, NGOs have been
transformed themselved from non-profit to profit making
business models. Especially, the success formula of
microfinance not for profit model has been learned from
the concepts of PRODEM of Bolivia and Grameen Bank
of Bangladesh. It has been proved that committed for the
social development, NGOs can develop the society
through providing finance accessibility to the poor based
on self-help model. Many NGOs in India came forward to
promote microfinance. At present more than 1000 NGOs
are implementing micro-finance projects in India.

III. ROLE OF NGOS AS PROMOTER AND
FACILITATOR

NGOs play a vital role in the sustainable community
development through various programs like capacity
building which may lead to sustainable community
development. Microfinance is a means through which
capacity of individuals can be developed; this can be
exhibited in the following diagram:









The above diagram exhibits the relationship between
NGOs functions, empowerment and sustainable
community development. From this perspective, NGOs
functions in community development are, among others,
developing the local production and local markets; help
the community to develop the social, capital and human
resources; increase the knowledge and skills; encourage
people to participate in activities, and act as a network
between community and systems. The involvement in
these activities would lead to them become empowered,
which is the output of community development. In the
long-run, the outcome would be sustainable community
development. The practice of small groups of rural and
urban people grouping together to form a savings and
credit organization is well established in India which led to
formation of SHGs. In the early stages, NGOs played a
pivotal role in developing the SHG model and in
implementing the model to develop the process fully. The
most popular forms of economic empowerment for women
is microfinance which provides credit for poor women
who are usually excluded from formal credit institutions
for effective implementation of SHG model.

The Self Help Group (SHG) model is one of the laudable
approaches towards community development. In the SHG
model women participation is given the priority, through
which they can able to earn an extra income which may be
utilized towards children education and sanitation. The
formation of SHG resulted into several key benefits like
stronger political and advocacy capabilities, sharing of
knowledge and experiences, economies of scale, and
access to greater capital.

IV. KEY CONSTRAINTS

The major constraints in expanding rural micro credit are
important to consider not only the specificities of the rural
sector and the challenges that these present to rural
financial intermediation but also, the general constraints
present in the financial markets that affect micro-credit.

Country-level constraints affecting the financial sector as a
whole can prevent rural financial markets from operating
efficiently. These include unsound macroeconomic
policies and management; restrictive financial policies
(particularly interest rate controls); insufficient
institutional capacity within microfinance institutions to
achieve high levels of outreach in a sustainable manner;
underdeveloped legal systems, particularly with respect to
property rights, resulting in weak collateralization of
Functions of NGOs
Microfinance
Capacity Building
EMPOWERMENT
Economic
Social & Individual
Sustainable
Community
Development
International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421
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i-Xplore International Research Journal Consortium www.irjcjournals.org
72
claims and inadequate contract enforcement mechanisms;
inadequate prudential regulations and supervision of
financial intermediaries; and poor governance, corruption,
and other political factors that raise risks.

Apart from the above country level constraints, the rural
financial markets may pose additional constraints for
development of micro-credit. Rural population in most of
the developing countries is mainly engaged in small-scale
agriculture or agriculture-related activities and is generally
poorer than their urban counterparts. The characteristics of
rural financial markets are largely determined by the
spatial, temporal and covariant nature of most rural
economic settings, and include the following inherent
impediments to efficient markets: (i) low population
density, small average loans, and low household savings,
which increase the transactions costs per monetary unit of
financial intermediation; (ii) lack of infrastructure
(communications, electricity, transportation, etc.), limited
social services (education, health, etc.), and low
integration with complementary markets result in highly
fragmented financial markets that involve high costs of
overcoming information barriers and limit risk
diversification opportunities; and (iii) seasonality of
agricultural production and susceptibility to natural
disasters (such as flood, drought and disease) heighten the
probability of covariant risks (in prices and yields)
affecting client incomes and add to the costs of rural
financial intermediation.

V. ROLE OF MICROFINANCE NGOS

Many policy makers, donors and implementing agencies
un-necessarily limit their vision of NGOs to that of direct
implementation of credit activities. As documented by
Opportunity International and TechnoServe, NGOs have
the potential to play an expanded role in the development
of a microfinance industry.

Direct Lender - The NGOs provide loans to low income
people and those living in remote rural areas. They employ
methods that allow it to cover all of their costs with earned
income when they reach adequate economies of scale.
The NGOs may borrow from the financial markets to
increase the size of their revolving loan fund. Some NGOs
playing this role have converted themselves into banks,
bringing NGO methodology to the formal sector by
becoming Formal Sector Financial Institutions themselves.
Few examples in this direction are Womens World
Banking MASU (Ghana), Grameen Bank, Opportunity
International, PRIDE.

Matchmaker - The NGOs link borrowers and savers to the
banks. They take on the tasks of organizing, training,
assessing, monitoring and collecting from the clients. The
bank provides loan capital and accepts savings deposits.
The NGOs receive income for the services they provide,
either as a fee from the bank or by borrowing from the
bank and re-lending the money to their clients at a higher
rate.

Packager - The NGOs provide production, marketing,
management and accounting assistance and training to
rural enterprises to help them develop to the point where
they can access financial services from a bank. In certain
instances, the NGOs provide guarantees so that the bank
has a greater degree of comfort in lending to these
enterprises, although these guarantees are partial and are
designed to phase out over time. The work of NGOs is
developing financially viable enterprises, but fees charged
to rural enterprises for this service do not cover the full
cost of providing the services.

Product Developer - The NGOs experiment with
innovative methods for providing financial services in
rural areas. They develop credit and savings products that
banks can implement profitably. NGOs then teach the
banks how to use these products.

Trainer of Financial Institutions - The NGOs provide
training to the staff and management of a bank, helping
them to understand and implement successful
methodologies for rural financial intermediation. The best
examples are ACDI/VOCA.

Trainer of NGOs - The NGOs provide training to other
NGOs, helping them to acquire the expertise and financial
disciplines needed to implement financial service
programs. The NGOs playing this role, often serves as an
apex institution, coordinating training and evaluations of
several NGOs working in rural finance.

VI. CONCLUSION

Inspired by the success of the German and Dutch rural
credit systems, India is one of the few countries in the
developing world that has followed the model of credit-led
rural development and poverty alleviation. This has led to
the set up of credit cooperatives but found inadequate to
meet the challenges. The inadequacy and ineffective
functioning of credit cooperatives have directed
commercial banks to rope in and focusing attention to
rural credit by establishing Rural Banks. In spite of this,
even today about 70% of rural Indians do not possess even
the basic savings bank accounts. For inclusive growth the
penetration of basic banking services is required and
within the constraints of commercial banks for operating
in the rural areas NGOs will definitely help in this
direction through micro-financing activities. In order to
reach different segments of diverse rural financial markets,
institution-building should also include efforts to
encourage the introduction and diffusion of other financial
services besides credit, such as deposits, crop insurance,
commodity collateralized finance (e.g. warehouse
International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421
Volume 2, No. 4, April 2013


i-Xplore International Research Journal Consortium www.irjcjournals.org
73
receipts), hedging instruments, and micro leasing. These
products hold the potential to assist in risk and liquidity
management as well as lowering transaction costs.

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