MICRO FINANCE: DRIVER FOR SUSTAINABLE ECONOMIC DEVELOPMENT
By
Dr. Punit Kumar Dwivedi
(Assistant Professor)
Dr. R.K. Sharma
(Professor)
Prestige Institute of Management and Research, Indore.
Abstract
Macro-financial Institutions like banks have been reluctant to provide financial services to
customer with little or no cash income. Microfinance serves as a tool for providing financial
services to the low-income population, who do not have an access to the conventional financial
services. The main idea behind micro finance is that poor people, who can’t provide any
collateral, should have access to some sort of financial services in order to enable them to raise
their income levels and to improve their living standard. Micro finance began with micro credit.
The aim of this research paper is to analyse the relationship between Micro credit i.e. micro loan
to SHGs and GDP. The annual data of these two variables for the period 2007-08 to 2012-13
have been analysed. For the purpose of analysis the statistical tools like Mean, Standard
deviation, coefficient of co-relation and regression have been used. The result indicates a
positive correlation between two variables and also shows that there is a significant impact of
microloans to SHGs on GDP.
Key Words: Microfinance, Micro Loans, Self Help Groups, GDP Improvement, Indian Context,
ECONOMIC DEVELOPMENT TROUGH MICRO FINANCE IN INDIA: An Empirical Analysis
By
Dr. Punit Kumar Dwivedi
(Assistant Professor)
Dr. R.K Sharma
(Professor)
Prestige Institute of Management and Research, Indore.
1. INTRODUCTION
Microfinance is viewed as an important tool for providing self employment for the low income
rural population. This paper studies the various delivery models of microfinance institutions
which contribute to the development in India. The concept of Microfinance – a real vaccine for
poor people – emerged in late 1970. Grameen bank of Bangladesh with the micro finance
pioneer Prof. Mohammad Yunus started and shaped the modern industry of microfinance. Prof.
Mohammad Yunus for the first time felt that even poor people and women need loans.
Microfinance is an economic development approach that involves providing financial services
through institutions to low income people. Microfinance has emerged to meet special goals to
empower underprivileged class of society. The basic principle of microfinance is founded on the
philosophy of cooperation, equality, equity and mutual self help.icrofinance typically refers to
microcredit, savings, insurance, money transfers, and other financial products targeted at poor
and low-income people, whereas Microcredit refers to very small loans for unsalaried borrowers
with little or no collateral, provided by legally registered institutions. Currently, consumer credit
provided to salaried workers based on automated credit scoring is usually not included in the
definition of micro credit.“Gross Domestic Product is the market value of all officially
recognized final goods and services produced within a country in a given period of time. GDP
per capita is often considered an indicator of a country’s standard of living. GDP per capita is not
a measure of personal income. Under economic theory, GDP per capita exactly equals the gross
domestic income (GDI) per capita. GDP is related to national accounts, a subject in
macroeconomics.” (G.L.Sharma & Puri, 2013). In the present research study an effort has been
made to find out whether there is any relationship between microfinance and economic growth or
not, where GDP represents the economic growth and micro finance is represented by microloans
to SHGs. The statistical techniques like mean, standard deviation, coefficient of variation,
coefficient of correlation and regression have been used.
2. LITERATURE REVIEW:
Naveen K.Shetty and Dr.Veerashekharappa (2009), The Microfinance promise in Financial
Inclusion: Evidence from India” studies the importance of microfinance in bringing about
financial inclusion. The paper studies impact of the increasing gap in demand and supply of
financial services in India which has led to the increasing population of the country to be
excluded from the formal financial credit system.
Pankaj K Agarwal and S.K.Sinha (2010) found in their study that the sustainability of
microfinance institutions is important in order to pursue their objectives through good financial
performance. This paper studies the various players in the microfinance sector which range from
not-for-profit organizations which work towards a developmental objective to commercial banks
which view microfinance as a good source of deposits with sound banking and as a measure to
reach their priority lending targets.
Jayasheela, Dinesha.P.T and V.Basil Hans (2008) studied the role of microfinance in the
empowerment of people and provision of sustainable credit availability to the rural low income
population.
Reeta Rautela, Gaurav Pant, Dr.Swati Anand and Deepika Sharma, “Microfinance: A new
Mantra for rural development” studies the evolution of microfinance institutions in India.
Microfinance is viewed as a development tool both in the local and he global environment. With
approximately 70% of population in India living in rural areas and with about 26% of population
living below the poverty line, microfinance in India is considered to be an important tool for
poverty alleviation and rural development.
Vanroose&D’Espallies (2009) in their paper analyzes the relationship between performance of
microfinance institutions (MFIs) and the development of the formal financial sector of the
country in which the MFI is active. They found that MFIs reach more clients and are more
profitable where access to the formal financial system is low. This finding is in line with the
market-failure hypothesis: MFIs respond to a need that banks do not fulfill and flourish where
the formal banking sector fails. Overall, the results shows that the macro-economic environment
is crucial to fully understand MFI-performance and that outreach and accordingly impact of
MFIs are contingent on financial sector development.
Shastri (April 2009) is of the openion that the dynamic growth of the microfinance industry has
been promoted not only by market forces but also by conscious actions of national governments,
Non-Governmental Organizations (NGOs), and the donors who view microfinance as an
effective tool for eradicating poverty. The powerful push behind this huge and increasing support
for microfinance indicated that national economic and social impacts are significant and it needs
to be examined more closely.
Sarmah & Das (2012) in their research paper made an attempt to analyse the role of MicroFinance and Self-Help-Groups (SHGs) for the socio-economic development of the poor people
in Lakhimpur district of Assam. For collecting the primary data a total of 50 SHGs and five (5)
members from each SHG (50x5=250 respondents) were randomly selected covering the entire
Lakhimpur district. The result of the study informs that after joining the SHGs the poor rural
people can increase their income and improve their standard of living by performing economic
activities independently.
Devaraja (May 2011) Raised question mark on the viability of the Microfinance Institutions.
Their research paper describes the three distinct aspects where government needs to play a role.
The first is to protect the rights of the micro-borrower, the consumer of micro-financial services.
The second is that of prudential oversight of risk-taking by firms operating in microfinance,
since this could have systemic implications. The third is a developmental role, emphasizing
scale-up of the microfinance industry where the key issues are diversification of access to funds,
innovations in distribution and product structure, and the use of new technologies such as credit
bureaus and the UID. The paper discusses the factors and theoretical position associated with
evolution of microfinance and its global acclaim based on it being a Win-Win proposition for
both Micro Finance Institutions (MFIs) and Clients. The paper brings out the missing link of
impact assessment in the Indian context, which is a precondition for poverty reduction on
account of the influence of new paradigm of Institutional viability under commercial
microfinance. The paper argues for mainstreaming impact assessment in evaluation of
programmes for realizing the full potential of microfinance in achievement of Millennium
Development Goals (MDGs).
Alain de Crombrugghe, Michael Tenikue and Julie Sureda (2007) There is plethora of
literature on performance of micro finance institution across the globe. They have studied three
important aspects of sustainability such as repayment of loans, financial self sustainability or
operational self sustainability and cost-control or efficient use of resources.
Rajarshi Ghosh (2005) in his research paper Microfinance in India: A critique, the evolution of
microfinance in empowerment of women and poverty alleviation is studied.
3. OBJECTIVES:


To understand the importance of microfinance in economic development
in India.
To find out improvement in GDP as a result of micro loans to Self Help
Groups in India.
4. METHODOLOGY:
Present study is an empirical study and based on secondary data drawn from the various issues of
the status of microfinance in India of NABARD and the report of Handbook of statistics on
Indian Economy maintained by Reserve Bank of India. To check the association between two
variables (Microloans and GDP) the data of 6 annual years from 2007-08 to 2012-13 are
considered. For the purpose of analysis the evaluation is done by using two important statistical
techniques namely descriptive statistics and regression analysis. Apart from that Mean, Standard
Deviation, Co-efficient of variation and correlation have also been used.
5. ANALYSIS AND INTERPRITATION:
To shape this research study, two statistical techniques namely coefficient of correlation and
regression analysis have been used. Correlation and regression analysis are related in the
sense that both deal with relationships among variables. Neither regression nor correlation
analyses can be interpreted as establishing cause-and-effect relationships. They can indicate
only how or to what extent variables are associated with each other.
Table 1.
Year
(Rs. In Crores)
GDP at Factor Cost
2007-2008
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013
Average
3896636
4158676
4516071
4918533
5247530
5482111
4703259.5
Micro Loans Distributed to SHGs
Amount (in Crores)
Number of SHGs (In
Lakhs)
8849.26
12.27
12253.51
16.10
14453.30
15.87
14547.73
11.96
16534.77
11.48
20585.36
12.20
14537.32
Source: Status of Micro Finance in India 2009-2010 & 2012-13, NABARD, Handbook of Statistics India Economy, RBI
5.1 Regression Analysis
A model of the relationship is hypothesized, and estimates of the parameter values are used to
develop an estimated regression equation. Various tests are then employed to determine if the
model is satisfactory or not. If the model is deemed satisfactory, the estimated regression
equation can be used to predict the value of the dependent variable given values for the
independent variables.
In order to established the relation between Microloans to SHG and GDP it is assumed that there
is a linear relationship between them and so the regression equation can be written as:
GDP = a + b × MLS
Where, GDP = Gross Domestic Product
MLS = Microloans to SHGs
a and b are the constants to be determined.
5.1.1 Normality Test:
One of the important assumptions of regression technique is that the data must be normally
distributed. If the data are not normally distributed, the result of regression model is no nearer to
the fact. Therefore to test the normality of data, Kolmogorov-Smirnov test and Shapiro-Wilk
Tests were applied and results are depicted in the table 2. The result highlighted that the data are
normally distributed.
Table 2
Tests of Normality
Kolmogorov-Smirnov(a)
Shapiro-Wilk
Statistic
df
Sig.
Statistic
df
Sig.
GDP
0.142876
6
0.2 0.958458
6 0.807783
MFC
0.165616
6
0.2 0.981111
6 0.956945
a Lilliefors Significance correction
5.1.2 Hypothesis Testing
A study of the relationship between Microloans to SHGs and Gross Domestic Product for all six
year would be of interest. This may be studied by applying regression analysis.
Null Hypothesis:
There is no significant relationship between Microloans to SHGs
and Gross Domestic Product in all SUCBs
Alternative hypothesis:
There is significant relationship between Microloans to SHGs and
Gross Domestic Product in all SUCBs
After making necessary calculation of the Gross Domestic Product and Microloans to SHGs, the
regression analysis is presented in the table 3. It is clear from the table3 that the value of t
statistics of regression coefficient is 5.96 and its significance value is 0.003, which is less than
0.05. Therefore the null hypothesis is rejected. So it can be conclude that the estimated
coefficient in above model is significant at 95 percent level. The value of R square is reported to
be 0.898 in above regression model. Hence it can be said that about 90% variation in the GDP is
due to the variation in MLS and rest of change is due to other factors. The value of regression
coefficient is found to be positive which implies that with an increase in MLS, the GDP had also
increased. This regression coefficient value is noted to be 149.04 which shows that with increase
of one rupee in MLS, there is 149.04 rupees increased in GDP.
Table 3
Regression Statistics
Multiple R
0.948069744
R Square
0.89883624
Adjusted R Square
0.8735453
Standard Error
221015.3942
Observations
6
Coefficients
Standard Error
t Stat
P-value
Constant
MLS
2536490.94
149.0486769
374490.7442 6.773173915
25.00174514 5.961530928
0.00248
0.003975
5.2 Correlation Analysis
The measure of the strength of linear dependence between two variables, widely known as
Pearson product-moment correlation coefficient was developed by Karl Pearson from a related
idea introduced by Francis Galton in the 1880s which is denoted by r. Values of the correlation
coefficient are always between -1 and +1. A correlation coefficient of +1 indicates that two
variables are perfectly related in a positive linear sense; a correlation coefficient of -1 indicates
that two variables are perfectly related in a negative linear sense, and a correlation coefficient of
0 indicates that there is no linear relationship between the two variables.“Pearson's correlation
coefficient when applied to a sample is commonly represented by the letter r and may be referred
to as the sample correlation coefficient or the sample Pearson correlation coefficient. The
formula for r is:
An equivalent expression gives the correlation coefficient as the mean of the products of the
standard scores. Based on a sample of paired data (Xi, Yi), the sample Pearson correlation
coefficient is:
Where,
are the standard score. Sample mean and sample standard deviation, respectively”
5.2.1 Testing of Hypothesis
A study of the correlation between Microloans to SHGs and Gross Domestic Product for all six
year would be of interest. This may be studied by applying correlation analysis.
Null Hypothesis:
There is no correlation between Microloans to SHGs and Gross
Domestic Production all SUCBs .
Alternative Hypothesis:
There is significant correlation between Microloans to SHGs and
Gross Domestic Production all SUCBs.
After making necessary calculation the correlation matrix is presented in Table4which clearly
indicates that there is high level of positive correlation between the variables. The correlation
between the microloans to SHGs and GDP is 0.95% which shows that both the variable moves in
the same direction together, hence the null hypothesis that there is no correlation between the
microloans and GDP is rejected.
Table 4
Correlation Matrix
GDP
Micro Loans to SHGs
GDP
1
Micro Loans to SHGs 0.948069744
1
5.3 Descriptive Statistics
It is apparent from the table 5 that the mean of GDP and Micro loans to SHGs were Rs.
4703259.50 crores and Rs. 14537.32 crores respectively. The median point for GDP and Micro
Loans to SHGs was Rs. 4717302 and Rs. 14500.52 respectively. The kurtosis is – 1.697 for GDP
and 0.707 for Micro Loans to SGHs.
Table 5
GDP
Mean
Standard Error
Median
Standard Deviation
Sample Variance
Kurtosis
Skewness
Range
Minimum
Maximum
Sum
Count
Confidence
Level(95.0%)
Descriptive Statistics
Micro Loans to SHGs
4703259.5 Mean
253734.4353 Standard Error
4717302 Median
621519.8967 Standard Deviation
3.86287E+11 Sample Variance
-1.697760873 Kurtosis
-0.061509235 Skewness
1585475 Range
3896636 Minimum
5482111 Maximum
28219557 Sum
6 Count
14537.32167
1613.955563
14500.515
3953.367596
15629115.35
0.707648302
0.161463923
11736.1
8849.26
20585.36
87223.93
6
652245.1302 Confidence Level(95.0%) 4148.804852
6. CONCLUSION:
Macro-financial institutions like banks have been reluctant to provide financial services to person
with little or no cash income, because of number of reasons. Lack of loan and other financial
services from banks and other institutes forces the poor to rely heavily on relatives or local
money lenders at the time of need. Usually interest rates of moneylenders are very high.
According to a 1995 World Bank estimate, in most developing countries the formal financial
system reaches only the top 25% of the economically active population, the bottom 75% have no
access to financial services apart from moneylenders. Microfinance is a tool to rescue the poor
from the arms of moneylenders. According to famous economist Robinson, Microfinance refers
to small-scale financial services for both credits and deposits - that are provided to
unemployed or low-income individuals or groups who would otherwise have no other means of
gaining financial services. Ultimately, the goal of microfinance is to give low income people an
opportunity to become self-sufficient by providing a means of saving money, borrowing money
and insurance. Microfinance is playing significant role in economic development of India. The
study clearly shows that there is high level of association between microfinance and economic
development which is represented by microloans to SHGs and GDP respectively. Apart from that
study undoubtedly indicates that with an increase in Micro Loans to SHGs, the GDP has also
increased. If microfinance sector will grow faster, it has good potential to improve the living
standards of the population and thereby economic development can definitely be achieved.
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