Application of an Alternate Framework for Assessing Microfinance Programs’ Contribution to Development: An Empirical Study in Tamil Nadu, India

• Date: 01 May 2015
• Author: Savita Shankar
• Published date: 01 May 2015
• DOI: http://doi.org/10.1002/jsc.2006

Strat. Change 24: 225–241 (2015)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/jsc.2006 RESEARCH ARTICLE

Copyright © 2015 John Wiley & Sons, Ltd.

Strategic Change: Brie ngs in Entrepreneurial Finance

Strategic Change

DOI: 10.1002/jsc.2006

Application of an Alternate Framework for Assessing

Micro nance Programs’ Contribution to Development:

An Empirical Study in T amil N adu, I ndia

1

Savita Shankar

Keio Business School , Japan

Micro nance programs are of interest to development practitioners primarily

because they show potential for being  nancially sustainable instruments to allevi-

ate poverty. While considerable research has been conducted to assess the poverty

impact of micro nance programs, there is still no consensus on this issue ( Hermes

and Lensink, 2011 ; Roodman, 2012 ). Di culties arise due to a variety of factors,

such as self-selection into programs, non-random program placement, spill-over

e ects of programs from participants to non-participants, and non-random attri-

tion of program participants. While randomized control trials provide a means to

address most of these issues, they require control and treatment groups that can

be compared before and after provision of micro nance.  e di culties of ensur-

ing that the control groups remain without access to micro nance programs

during the study period result in the time span of the studies being shorter than

desired. Recent randomized control trials conducted by Karlan and Zinman

( 2009 ) and Banerjee et al . ( 2009 ) were also limited by the short time frames over

which impacts were measured. Milana and Ashta ( 2012 ) provide a detailed review

of studies on the poverty impact of microcredit and  nd that the positive impact

of micro nance on poverty has not been proven by any of the studies.

While there is a lack of evidence regarding the poverty impact of micro nance

programs, as pointed out by Cull et al . ( 2009 ), there is broad agreement on the

need for  nancial services which can bene t a large number of people without

access to banks.  is emphasizes the role of micro nance institutions (MFIs) in

promoting  nancial inclusion.

Financial inclusion, being an

important policy objective,

assessing micro nance institutions

from the perspective of their

contribution to it, is useful.

Graduation of group microcredit

members to individual  nancial

services is an essential step

toward long-term  nancial service

access.

Group members were able to

graduate to individual loans only

if they used their loans primarily

for business purposes and if their

businesses could absorb

progressively increasing loan sizes.

1 JEL classi cation codes: G18, G21, G29, L31.

Micro nance institutions can enhance their contribution to  nancial inclusion

promotion by expanding their suite of  nancial services, participating in a

credit bureau, and providing portability of accounts, greater  exibility in operation,

and  nancial literacy training.

226 Savita Shankar

Copyright © 2015 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

became regarded as an important policy goal as part of

the Washington Consensus ( Williamson, 1990 ). Toward

the end of the 1990s, targeted poverty reduction was

augmented to the Washington Consensus list ( Rodrik,

2005 ). Financial inclusion began to be regarded as an

important policy goal after the 2002 Monterrey Consen-

sus under which heads of state resolved to address the

challenges of  nancing for development.  e 2006 UN

report entitled ‘Building inclusive  nancial sectors for

development’ also drew attention to the issue.

Studies by Carbo et al . ( 2005 ) and Kempson ( 2006 )

indicated that  nancial inclusion encompasses breaking of

barriers. Kempson and Finney ( 2009 ) made a distinction

between ‘supply side’ and ‘demand side’ barriers to use of

savings services. A similar distinction between supply-side

and demand-side barriers – though more broadly with

regard to use of  nancial services – is made in this article.

 e important supply-side factors that emerge from the

literature review are non-availability of suitable products,

physical barriers to access (typically distance to bank

branch), and non-eligibility on account of documentation

issues. Moreover, even if banks want to lend to low-

income individuals, they face the problem of asymmetric

information when dealing with the market due to lack of

credit histories, collateral, and insurance.  e asymmetr y

in information results in di erences in credit quality

among borrowers being unobservable, which in turn

a ects market e ciency ( Akerlof, 1970 ; Rothschild and

Stiglitz, 1976 ). If the lenders set the interest rates high

enough to cover the overall risks involved, it could cause

low-risk borrowers to drop out of the applicant pool

causing an adverse selection problem for banks. At times,

equilibrium in the credit market can be consistent with

credit rationing, as lenders do not react to excess demand

by increasing interest rates, because of the adverse selec-

tion e ect ( Stiglitz and Weiss, 1981 ). Williamson ( 1987 )

showed that even without adverse selection and moral

hazard, costly monitoring could lead to credit ration-

ing. In addition to these supply-side issues, the demand-

side issues of  nancial literacy and  nancial capability,

 is article proposes assessing micro nance programs

based on their contribution to  nancial inclusion. Finan-

cial inclusion is de ned here as ongoing access to a range

of  nancial services in an a ordable

2 and convenient

manner.  e de nition emphasizes the fact that access to

 nancial services needs to be available on a continuous

and not on a one-time basis.  is is because, while the

speci c  nancial services required by an individual may

vary over time, the option to use  nancial services needs

to be routinely available. A second point emphasized is

that for access to  nancial services to translate into actual

usage, the practical concerns of a ordability and conve-

nience need to be considered. As the  nancially excluded

are often low-income groups, a ordability is important.

Convenience is also a desired attribute because if accessing

 nancial services imposes unduly high costs in terms of

time and e ort (that is, high economic opportunity costs),

the motivation to use them is reduced.

 e rest of the article is organized as follows: the fol-

lowing section proposes a framework for analyzing  nan-

cial inclusion initiatives based on the  nancial inclusion

literature.  e third section describes the research ques-

tions and methodology.  e fourth section gives the

research  ndings. A  nal section provides conclusions and

recommendations.

Framework for analysing  nancial inclusion

contribution

 e importance of the  nancial system ’ s role in economic

growth was emphasized by Gurley and Shaw ( 1960 ) and

McKinnon ( 1973 ). A number of later empirical studies

speci cally suggested that the development of the  nan-

cial system spurs growth in an economy ( King and Levine,

1993 ; Aghion et al ., 2003 ; Rajan and Zingales, 2003 ). In

the meantime, by the late 1980s,  nancial liberalization

2 ‘ A  ordability’ implies that even for very low-income

individuals, the cost of  nancial services should not be a

barrier to access.