Micro-credit and Habitat

The micro-credit movement was initiated in the early 1980s by Grameen Bank, one of Bangladesh’s best known micro-credit providers. The sustainability of the model inspired many credit institutions, governments and NGOs to recognize the significance of a stable income and capital accumulation, thereby replicating it as a tool to alleviate poverty.

Multilateral development banks, even in this era of budget cuts, are embracing micro-credit to move away from the capital-intensive ‘development as charity’ model to the potentially more profitable ‘development as business’ model. Perhaps most significantly, the financial community has woken up to the fact that there is a great deal of money to be made in micro-lending, where interest rates can range from 20 to 100 per cent. However, the advocates of both schools of thought are not in agreement on how things should move. The financial school that believes in ‘development as business’ clashes with the followers of the ‘development as charity’ school, which fears that, if sustainability and financial performance become the major criteria, credit institutions will start avoiding the poorest again.

Whatever be the mode of operations, the alternate credit mechanism is shaking the solid foundations of the time-tested banking system, which fails to understand as to why the poor have always borrowed from expensive money-lenders – and continue doing so in spite of the existence of a strong and established banking system. A borrower in need wants the hassle-free and immediate credit that banks are unable to provide for which he/she is willing to pay an exorbitant interest.  Micro-credit coupled with savings and insurance was created to address this need.

A typical micro-credit lending scheme targets those who have no land or assets and who are part of a self help group  (comprising 10-20 members). Savings is an integral part of the programme and generally groups start with intra and inter group loaning. Financial institutions generally make credit available after a verification of monthly book-keeping and attendance of the group in question.

Micro-credit in India

India is fast overtaking Bangladesh as the largest micro-finance market in the world, with more than 30,000 self-help groups (SHGs) with a membership of over 5,00,000, mostly women. Membership is projected to reach 1 million by 2008. India is still considered a novice in this field, but it can offer solutions to many of problems that have been plaguing micro-credit internationally for the last decade. In India, micro-credit institutions are going beyond delivering financial services and are genuinely changing the lives of poor people by integrating micro-finance services into wider development strategies. Although different micro-finance models exist, interestingly product/service innovation is part of all the models.

Micro-credit and habitat

Habitat, the natural environment of an individual entails the security of the minimum basic needs and rights of an individual. These are: Shelter, Nutrition, Water , Ecology, Livelihood, Health, Energy , Gender equity and Literacy . If these needs are not met, it leads to disharmony and chaos in the society. A general perception about mitigating the negative impacts is making money available to the individuals either through charity mode or any credit mechanism. Though it is true to some extent, one has to look beyond credit and devise financial services which on its own is viable, replicable and sustainable.

There are a few models already working in India that are worth mentioning.

Shelter

Housing Development Finance Corporation (HDFC) : playing the role of a driver and a catalyst

In 1989, HDFC in collaboration with the Kreditanstalt fur Wiederaufbau (KfW), a German development bank responded to the need for better housing for the economically weaker section of the society. The housing loans made available are flexible and can be tailored to the specific requirements of the project area. Typical security is the mortgage created on the houses and the credibility of the co-ordinating agency.

Scattered housing projects have been financed both in urban and rural areas across India, including remote tribal villages in the North-East and in the hills of Orissa. The schemes are marked by people’s participation, with the borrowers contributing labour and building materials. HDFC promotes the usage of innovative low-cost technologies and local materials to build the houses. After the project is completed, the community is surveyed and any lessons learned are incorporated into future initiatives.

Over the years, HDFC has also provided housing and infrastructure support to the victims of natural disasters. Several innovative financial mechanisms have been developed through these projects and the overall loan recovery has been a high 98 per cent%. The repayment of these loans is being utilized as a revolving fund to further finance similar housing projects. The interest earned is used for support services like capacity building of the implementing NGOs , developmental initiatives for benefiting the low- income households in India etc.

To make this initiative viable, HDFC created Shelter Assistance Reserve (SAR) fund to address the shelter problems in general and the peripheral issues associated with shelter needs. Each year the corporation grants capital to the fund. The initial contribution to the fund came by way of an appropriation from the corporation’s profits. From its profits, The money reserve is utilized to provide in the form of subsidized loans and grants to help non-government organizations (NGOs) and other institutions working for the economic and social upliftment of the marginalized poor. The wide spectrum of integrated development initiatives also includes education, training and research, women’s welfare, community health care, and economic assistance for the physically disabled, among several others. Funds are also utilized for institutional development to support new ventures in the social sector. Every year, some amount is appropriated out of HDFC’s profits for utilization under the SAR.

Sanitation

Sulabh International, India

Sulabh is an Indian NGO employing 20,000 people was set up to market low-cost twin pit latrines in urban slum areas. Over 5,00,000 households have gained access to credit through both formal and informal mechanisms, including agents. Sulabh sets target collection rates for the collectors, but does not burden them with formal book-keeping. The B-0-T, i.e., Build-Operate-Transfer model adopted by  Sulabh ensures the investment return through the ‘pay-and-use’ strategy. Although Sulabh has received grants, the widespread extent of the latrine programme indicates that it is financially viable and reaches the needy.

Health/housing infrastructure

SEWA (Self Employed Women’s Association)

SEWA’s main goals are to organize women workers for full employment. SEWA members have no fixed employee-employer relationship and depend on their own labour for survival. Poor women need support services like savings and credit, health care, childcare, insurance, legal aid, capacity building and communication services. Provision of these services have also led to creation of jobs.

SEWA members devised their own banking solution: ‘a bank of their own’, where they would be ‘accepted in their own right and not be made to feel inferior’. More than 4,000 members contributed Rs.10 each to establish the Mahila Sewa Co-operative Bank in May 1974. Today, the bank has 1,25,000 self-employed women depositors and has disbursed collateral-free loans of over Rs.350 million.

HYPERLINK “http://sewa.org/services/health.htm ”Linking health security to work security means that all economic activities at SEWA have a health component, and all health activities in turn, are linked to producers’ groups, workers’ trade committees, self-help groups and their economic activities.: These activities emphasize self-reliance,  both in economic terms and sense of ownership by women themselves who also control and manage their own health activities. Also, women are ready to pay for these services and in fact, this makes the supportive services financial viable. Housing today is better due to improved  access to finance for shelter, legal advice, technical assistance, information, and shelter-related income opportunities for poor working women. SEWA has influenced housing and infrastructure-related urban and rural development policies programmes and brings the benefits of these policies within the reach of poor women by promoting their own institutions.

Livelihood

Development Alternatives:  An alternative approach to micro-enterprise creation and multiplication

Small and micro enterprises generate up to 40 per cent of rural and half or more of urban jobs. Between 500 million and one billion of the world’s economically active poor people run such businesses, ranging from trading and service activities to small-scale production. Micro-enterprises meet basic human needs, provide skills and entrepreneurial training, and act as a vital link with formal sector businesses. More important, they alleviate poverty. Yet fewer than two per cent of micro and small businesses have access to credit other than informal moneylenders charging exorbitant interest rates.

Much effort by government and NGOs has gone into the sustenance and growth of tiny and small-scale industrial sector, but sustained growth and profit is elusive. The reasons are not hard to find. Studies have shown that businesses need support in technology, finance, and marketing.

Development Alternatives (DA) has taken the lead in Southern Karnataka to provide technology, finance, and marketing services under one umbrella. Supported by the Rockefeller Fund, Technology Action for Rural Advancement (TARA) has been instrumental in organizing an association of micro-concrete roofing (MCR) producers.  The fund has been used to finance up to 50 per cent of the cost of the equipment at an interest rate of 12 per cent payable in 24 to 36 months through quarterly installments. The entrepreneur hands over post-dated cheques for the Equated Monthly Installment (EMI) and 50 per cent of the advance upon signing the agreement, and TARA owns the machines until the loan is paid off.

Studies in the building materials sector show that most enterprises fail because of poor quality and cut-throat price wars. To avoid this situation all the Southern Karnataka entrepreneurs have come together under the umbrella of the ‘MYCON Tile Manufacturing Association’ to promote a common brand name of ‘MYCON tiles’ based on a uniform pricing policy. This has benefited the businesses by sharing the cost of promotion and maintaining uniform quality and price. Marketing the tiles is the responsibility of individual entrepreneurs. The members of the association created a promotional plan including a budget and time line which is monitored through the Development Alternatives building materials programme.

Conclusion

Micro-finance is an extremely powerful concept, and it is overturning our traditional view of development. In the past 10 years, innovative micro-credit programmes have shattered that old paradigm concerning the poor. We are seeing a shift in micro-financing from government and donor-funded subsidized credit to sustainable financial intermediation between borrowers and savers. With economic viability, micro-enterprise financing has become linked to financial markets- bringing extensive commercial support.

However, the general apprehension is that the poor are too high a credit risk. Negative perceptions about the poor have distanced credit programmes from a significant proportion of the vulnerable. The financial sustainability of the most of the micro-finance institutions (MFIs) is dismal as per the findings of M-Cril, a credit-rating agency for MFIs in India. They do not account properly in their systems for the grant and soft loan components, even though the loss of that money would sink the lending mechanisms. It has been felt that micro-finance is not sufficient to nourish these SHGs. Support systems are required which would build capacities of the SHGs as well as of the MFIs to undertake the work of micro-credit. The MFIs need to work professionally, aiming for financial sustainability but not excluding the poorest.

Thus, micro-finance has tremendous potential as an instrument for meeting the habitat needs, but it alone is not a panacea for answering the mentioned habitat needs or for reaching the vulnerable section. It must be backed by more than just cash namely, institutional building, establishing fertile ground, macro-economic considerations, and better regulatory and , legal, environment and political environments. There is a need for steps to reinforce the borrowers’ capacity to develop businesses that grow is as important as the actual funds made available for loans.  q

Beyond Micro-credit; Fisher, Thomas and  Sriram, M. S.; 2002; Vistaar Publications, New Delhi; Oxfam Oxford in association with New Economics Foundation.

www.sewa.org

www.grameenbank.org

www.devalt.org