CONTRIBUTION OF MICRO FINANCE IN ERADICATING

POVERTY AMONG THE RURAL PEOPLE IN THE

DEVELOPING NATIONS:

The quote ”the notion of poverty has some inherent ambiguities” by

Dr. Amartya Sen is true for a developing economy like India, where poverty is the most
important visible characteristic of economic underdevelopment. Poverty in turn is an
offshoot of different layers of inequality, like inequality in the distribution of world
income, inequality in the distribution of income within the economy as well as inequality
within an individual family.
Inequality and poverty are two interrelated terms and the adverse impact
of both result in illiteracy, ill-health and lack of hope for future among the people who
are the victims of such two dangerous socio-economic problems. Poverty acts as the
biggest impediment on the way of an economy’s development, therefore removal of
poverty should be the prime goal of any developing economy.
“Poverty” in general is defined as a situation when people are unable to
satisfy their basic needs of life. According to the definition of the Planning Commission
of India, “poverty line is drawn with an intake of 2400 calories in the rural areas and
2100 in the urban areas.” If a person is unable to get that much minimum level of calories
then he/she is considered as being below poverty line. As a developing economy India is
characterized by an impressive GDP growth rate of 7.4% as in 2009, inspite of which
poverty is still rampant, an estimated 250 million people are below the poverty line and
approximately 75% residing in rural areas.
The factors contributing to the vicious circle of poverty in India can be summarized
as :
i) High level of dependence on primitive methods of agriculture.
ii) High illiteracy (About 35% of adult population is illiterate).
iii) Regional Inequalities.
iii) Protectionist policies pursued till 1991 that prevented high Foreign Investment.

Though the Indian Government has initiated various poverty alleviation

programs since Indian independence such as the National Rural Employment
Guarantee Program (NREGP), National Rural Employment Program, Rural Landless
Employment Guarantee program still there has always been several loopholes in the
implementation of such programs. These loopholes have given birth to the existence
and persistence of the vicious circle of poverty in India resulting in lower income,
lower savings, lower investment and again in turn lower income of the poor rural
people mostly, either farmers or associated with small self sufficient businesses like
“bidi making or small handmade products made of bamboo like vases, stools etc”.
Along with prevalence of high level of dependence on primitive methods of
production in agriculture, old fashioned equipments and unpredictability of weather
conditions the insufficiency of credit has been the bane of Indian agriculture. The
Indian peasant as well as small self sufficient businesses run mainly by rural women
force has been traditionally a poor lot who needed loan not only for agricultural
 activities but also for bare subsistence. In many cases these people failed to repay the
loans and were subjected to tremendous exploitation in the hands of village money
lenders who charged exorbitant rates of interest on the loans they gave, as these people
were denied institutional credit facilities due to lack of collateral.
After Indian independence, to change the existing scenario of exploitation of
crores of people involved in agriculture, the Government decided to replace the
system of private money lending by institutional lending to the farmers. But much was
remained to be done to improve the conditions of the rural small self sufficient
businesses mostly run by women, who needed loans to run their businesses to pull
themselves out of the clutch of poverty. Though global poverty is a daunting
challenge, but by making very small loans to very determined people ,the Grameen
Foundation is helping the world’s poorest especially women to improve their lives and
escape poverty through access to microfinance and technology. Such an idea first
came into existence in Bangladesh under the active initiative of Professor Mohammad
Yunus.

The origin of Grameen Bank can be traced back to 1976 when Professor Muhammad
Yunus, Head of the Rural Economics Program at the University of Chittagong, launched
an action research project to examine the possibility of designing a credit delivery system
to provide banking services targeted at the rural poor.
The Grameen Bank Project (Grameen means "rural" or "village" in Bangla language)
came into operation with the following objectives:

1) extend banking facilities to poor men and women;

2) eliminate the exploitation of the poor by money lenders;
3) create opportunities for self-employment for the vast multitude of unemployed
people in rural Bangladesh;
4) bring the disadvantaged, mostly the women from the poorest households, within the
fold of an organizational format which they can understand and manage by
themselves.
And
5) reverse the age-old vicious circle of "low income, low saving & low investment",
into virtuous circle of "low income, injection of credit, investment, more income,
more savings, more investment, mo re income".

In October 1983, the Grameen Bank Project was transformed into an

independent bank by government legislation. Today Grameen Bank is owned by the
rural poor whom it serves. Borrowers of the Bank own 90% of its shares, while the
remaining 10% is owned by the government.
Both Professor Yunus and the Grameen bank believe that credit should be a human right
making microfinance work harder to help more people progress out of poverty.

In India several micro finance institutions like: SKS Microfinance Secu ndera bad, Pvt.
Ltd, 37SpandanaSphoorty Hyderabad, Public Ltd. Financial Ltd (SSFL), Share Microfin
Limited (SML) Hyderabad, Public Ltd, Shri Kshetra Dharmasthala Rural Development
Project Dharmastha la,(SKDRDP).. are rated among India’s top 10 MFI and are recorded
to be working successfully.
 Micro Finance is a proven tool for fighting poverty on large scale. It provides very
small or micro loans to poor people mostly women to start or expand very small self-
sufficient businesses. Unlike commercial loans no collateral is required for a micro loan
and its usually repaid within 6 months to a year.Those funds are then recycled as other
loans, keeping money working and in the hands of the borrowers. As a borrower, she
receives advice and support from the MFI that issued her loan, and support from other
borrowers just like her. Some MFIs also provide social services, such as basic health care
for her and her children. As her business grows and diversifies, she begins to earn enough
to improve the living conditions for her and her family. Microfinance clients boast very
high repayment rates. Averaging between 95 and 98 percent
MFIs are very client-focused. Some MFIs go directly to the borrower’s place of business
to issue loans and collect payments. Other MFIs host weekly borrowers’ meetings at the
local center where the transactions and other social services take place. During these
center meetings, borrowers empower each other to stay on the path out of poverty by
sharing successes and discussing ideas for solving business and personal problems.

Micro finance programs are funded by loans, grants, guarantees, philanthropists, social
investors, local banks, foundations, governments and international institutions.

Now the obvious question that comes to our mind is that why only women are provided
the loans?
Studies show that women use the profits from their business to improve their family
living standard and to expand their business.
Therefore we can conclude that with the functioning of the different large and
small micro finance institutions both in India as well as in the world would definitely
bridge the gap between rich n poor people and improve the living standards of the poor
people by increasing the poor people’s access to credit by moving along the path desired
by Professor Yunus. This initiative is expected to lead the under developed countries
towards gradual development by promising their rural folks a better tomorrow.