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MICROFINANCE FOR COMMUNITY DEVELOPMENT
149
Environment & Urbanization Copyright © 2008 International Institute for Environment and Development (IIED).
Vol 20(1): 149–163. DOI: 10.1177/0956247808089153 www.sagepublications.com
Microfi nance for community
development, poverty alleviation
and natural resource management in
peri-urban Hubli–Dharwad, India
ROBERT M BROOK, KAREN J HILLYER AND
G BHUVANESHWARI
ABSTRACT This paper reports on the fi ndings of a study of a microfi nance and
community mobilization initiative in six villages in the peri-urban zone of Hubli–
Dharwad in Karnataka state, southern India, where a number of self-help groups
established by two NGOs were studied over a three-year period (2001–2004).
Despite deliberate targeting of the poor and very poor sectors, their representation
in the self-help groups was found to be no different from their proportions in
the populations of the villages. (Targeting of women was more successful, with
64 per cent of members being female.) However, the poor and very poor were
more actively involved in microcredit than members of the other wealth classes.
Over the life of the project, the poor moved above the state poverty level and
their household savings increased by 647 per cent. More than 77 per cent of the
funds mobilized through this programme were raised through self-help group
subscriptions and a further 14 per cent came from linkages with banks. Findings
point to the success of the NGO-mediated self-help group model of community
mobilization and microfi nance provision relative to other models.
KEYWORDS income-generating activity / microcredit / non-government
organization / self-help group
I. INTRODUCTION
This paper describes a programme of community mobilization among the
peri-urban poor in six villages located around the twin city of Hubli–
Dharwad in Karnataka state, southern India. Starting in 2001, community
mobilization was facilitated by two indigenous NGOs (India Development
Service and BAIF Research and Development), and research was
conducted by two academic institutions (the University of Agricultural
Sciences, Dharwad, and Bangor University in the United Kingdom). The
research was part of a series of linked research projects funded by the UK
Department for International Development that commenced in 1997.
Hubli–Dharwad lies between Mumbai (Bombay), 600 kilometres to the
northwest, and Bangalore, 420 kilometres to the southeast, and is linked
to both by a major railway and a national highway, the NH4. The two
city centres are 20 kilometres apart, although the space between them is
rapidly being fi lled with building development. Their total population in
the 2001 Indian census was 786,018. Dharwad is an academic and admin-
istrative centre, while Hubli is a railway junction and is more industrial in
nature. Hubli also possesses a small airport, with daily scheduled fl ights
to Mumbai and Bangalore.
(1)
Dr Robert M Brook is a
Lecturer in Agriculture and
Rural Development at the
School of the Environment
and Natural Resources at
Bangor University. He was
the principal investigator
for the two DFID-funded
projects that are the
subject of this paper.
Address: School of the
Environment and Natural
Resources, Bangor
University, Bangor,
Gwynedd, LL57 2UW, UK;
e-mail: r.m.brook@bangor.
ac.uk
Ms Karen J Hillyer was a
Teaching and Research
Associate at CAZS Natural
Resources at Bangor
University. Her area of
expertise is participatory
rural development.
Address: CAZS Natural
Resources, Bangor
University, Bangor,
Gwynedd, LL57 2UW, UK;
e-mail: s.a.hughes@bangor.
ac.uk
Dr G Bhuvaneshwari was a
Research Associate working
on the two projects
described here, and was
based in the Peri-urban
Unit at the Department of
Agronomy of the University
of Agricultural Sciences,
Dharwad. She now teaches
home science at Krishi
Vigyana Kendra College in
Gangavati, Karnataka, India.
Address: Krishi Vigyana
Kendra, ARS Campus,
ENVIRONMENT & URBANIZATION Vol 20 No 1 April 2008
150
The six villages selected for inclusion in the project varied in terms of
their size, proximity to the city, accessibility and natural resource base
(Table 1). Only one (Mugad) had experienced any appreciable NGO
community development prior to commencement of the work described
here, and in the remaining fi ve, community mobilization was started
de novo. All six villages still had a signifi cant degree of agricultural activity,
including Gabbur, which was offi cially administered by the Hubli–
Dharwad municipal corporation. The remaining fi ve villages fell under the
jurisdiction of Dharwad district Zilla panchayat, the rural administration,
and either had their own village council (gram panchayat) or were members
of a shared council. All villages were connected to the city by bus services that
ran at least hourly, and there was a considerable degree of daily commuting
for work or other money-making activities. In composition, all the villages
apart from Daddikamalapur had a range of Hindu castes and a signifi cant
minority of Muslims. Daddikamalapur was formed by a group called the
Gowlies, who had migrated there sometime in the nineteenth century and
who speak their own north Indian dialect. They specialize in dairying
and, particularly, in the informal marketing of dairy products.
II. THE PROJECT
The approach taken by the two NGOs was to work with the poor and
establish self-help groups (SHGs or sangha) as the primary means of com-
munity mobilization; the NGOs posted community offi cers to live in
TABLE 1
Characteristics of the six study villages
Population Offi cial
Village name Location (2001 census) status Characteristics
Channapur 13 km southwest
of Hubli
1,388 Rural Medium-sized, poor village; high levels of
illiteracy; low agricultural potential; least
accessible of the project villages,
3 km from surfaced road.
Daddi-
kamalapur
8 km west of
Dharwad
592 Rural Small village settled by the Gowlie people,
who specialize in the production and
marketing of milk; good access to the city,
otherwise no facilities.
Gabbur 3 km south of
Hubli
511* Urban Unoffi cial settlement falling within the city
boundary but with distinct agricultural
features; poor facilities; notable for
wastewater-irrigated farming and dairying;
good access to Hubli.
Kotur 12 km northwest
of Dharwad
3,919 Rural Large village lying close to NH4 and an
industrial zone.
Mandihal 12 km west of
Dharwad
1,345 Rural Medium-sized village with many stone
quarries; located on a good road to
Dharwad.
Mugad 10 km west of
Dharwad
4,696 Rural Large village with fair facilities; good
access to Dharwad; extensive previous
NGO community development.
*Not a separate census district; population recorded by project staff.
Gangavati, Koppal District,
Karnataka, India; e-mail:
bvndwd@yahoo.co.in
Acknowledgement:
Numerous people were
engaged in the community
mobilization and research
processes. In particular,
we wish to thank the
community offi cers of
BAIF and IDS who lived
and worked with the
communities discussed
in this paper, and the
managers and supervisors
within these two NGOs
who facilitated the
work, besides imparting
wisdom borne from much
experience. Special thanks
are also due to the research
and project management
NGO, Best Practices
Foundation, who kept the
project wheels turning and
also documented the whole
community mobilization
process. This paper arises
from two research projects,
R7959 and R8084, which
were a component of the
MICROFINANCE FOR COMMUNITY DEVELOPMENT
151
the villages. In Mugad, where SHGs had been established previously, the
NGO community offi cers encouraged members of poor households to
form groups, either male or female. In the other fi ve villages, due to the
strong urban infl uence, there was some doubt about whether it would be
possible to establish SHGs and, initially, there was a considerable degree
of suspicion among villagers. To improve the level of trust, the NGOs
arranged events of common benefi t to the villages, such as a livestock
vaccination “camp”. The NGOs then arranged to take some of the
villagers to nearby rural villages where they had successfully facilitated
the formation of SHGs in previous programmes, so that they could talk to
their peers about their experiences of SHG membership. Following this, in
every case, SHGs quickly formed in the fi ve project villages. Between the
beginning and the end of the project, (October 2001 to September 2005),
45 SHGs were formed across the six villages, with 600 members overall,
and an average membership of 13 or 14 and a maximum of 20. During
the project period, one SHG ceased to operate, as some members migrated
away for work and others joined other groups.
Each SHG was properly constituted, with a chair and a committee.
Where there was no literate member, a literate person (usually a relative or
a person with some association with a member of the SHG) was identifi ed
to act as recorder and bookkeeper. The community offi cer trained the
SHG on how to operate the group, keep records and accounts, and
manage confl ict avoidance and resolution. Each group acted as what is
known in the microfi nance literature
(2)
as a ROSCA (Rotating Savings and
Credit Association), where at every weekly meeting each member would
pay a subscription, usually Rs 10 (approximately UK£ 0.13), which was
deposited in the SHG savings account.
III. METHODOLOGY
The data presented in this paper were collected from 18 (a 40 per cent
sample) of the SHGs across the six villages over a three-year period from
November 2001 to October 2004. The sample comprised 243 members
and represented 221 households, as only a small minority of households
had more than one member represented in the sample. Fifteen of the
sample groups were for women and three for men, and 27 per cent of the
membership of the SHGs surveyed were male, with men’s groups tending
to be larger than women’s (even so, male groups were slightly under-
represented in the sample).
Each SHG kept books with details of saving deposits, withdrawals,
repayments and purposes of the loans taken. In addition, data on
livelihood strategies were collected by a member of the research team,
when visiting each group. As each village had been chosen for the project
because of its distinct features, statistical comparisons between villages
were not conducted.
This paper focuses on differences between wealth classes and the
effects of easy availability of microfi nance upon livelihood strategies.
Data on household characteristics, occupations, uses to which loans were
put, and changes arising from SHG membership and availability of easy
microcredit were collected at group meetings, on those occasions when a
member of the research team was present.
1. More background on the
location can be found in other
publications by members
of the same research and
development team. See
Halkatti, M, S Purushothaman
and R M Brook (2003),
“Participatory action planning
in the peri-urban interface: the
twin city experience, Hubli–
Dharwad, India”, Environment
& Urbanization Vol 15, No 1,
April, pages 149–158; also
Bradford, A, R M Brook and C
S Hunshal (2003), “Wastewater
irrigation in Hubli–Dharwad,
India: implications for health
and livelihoods”, Environment
& Urbanization Vol 15, No 2,
October, pages 157–170; and
Brook, R M, S Purushothaman
and C S Hunshal (editors)
(2003), Changing Frontiers
– the Peri-Urban Interface,
Hubli–Dharwad, India, Books for
Change, Bangalore, India, 146 +
xii pages.
2. Snow, D R and T F Buss
(2001), “Development and
the role of microcredit”,
Policy Studies Journal Vol 29,
pages 296–307; also Thorp,
R, F Stewart and A Heyer
(2005), “When and how far is
group formation a route out
of chronic poverty?”, World
Development Vol 33, pages
907–920.
Natural Resources Research
Programme (Peri-urban
Interface System) funded
by the UK Department for
International Development
(DFID). The views expressed
in this paper are not
necessarily those of DFID.
ENVIRONMENT & URBANIZATION Vol 20 No 1 April 2008
152
IV. SELF-HELP GROUPS: WEALTH AND LIVELIHOOD
CHARACTERISTICS
During the period of SHG establishment, a series of participatory wealth
assessment focus groups were held in each village to determine the number
of people falling into each of the following nominated wealth classes:
rich, higher-medium, lower-medium, poor and very poor. These exercises
were conducted with a wide cross-section of the community, and they
allocated each household to one of the fi ve classes according to criteria of
land holding, type of house, capital asset ownership, earner to dependent
ratio, and occupation. In the two larger villages, these exercises had to be
repeated in different locations, where the respondents were familiar with
the households being classifi ed.
Typical household criteria across all six villages for inclusion in the
very poor category were as follows:
• they were landless or had very small land holdings (typically 0.2
hectares), often of unproductive land;
• they did not own a house and so lived in rented or government social
housing;
• their housing was generally small (typically 25–50 square metres);
• they had irregular unskilled work such as agricultural labour or
construction work;
• the earner to dependent ratio was low;
• they included more widows and elderly people, many female children
and children with physical or mental handicaps;
• they often displayed such “bad habits” as gambling or excessive
alcohol consumption; and
• they had large debts.
Typical characteristics of the poor households were as follows:
• they had a regular although low income from agricultural or unskilled
labour;
• they had their own low-paying business (carpentry, tailoring, bangle
selling) but were still just about able to meet the family’s needs;
• they had small land holdings (0.5–1 hectares); and
• they owned a small house, but often housed many relatives.
Typical characteristics of lower-medium households were as follows:
• they had regular semi-skilled work or their own business, maybe
a pension holder, and often more than one family member was
working;
• they usually owned 1–3 hectares of land, sometimes poorer land
within the village;
• they might own various livestock; and
• they might have many children or other dependents.
Typical characteristics of the higher-medium households were as
follows:
• many members of the household had salaried jobs such as government
employment, a skilled trade or a thriving small business;
• they owned 2–5 hectares of land, often with a borewell or some other
means of irrigation;
MICROFINANCE FOR COMMUNITY DEVELOPMENT
153
• they owned various livestock that they could lease out (e.g. oxen for
ploughing); and
• they owned a large house or maybe more than one house.
Typical characteristics of the rich households were as follows:
• there were several earners in the household, with professional em-
ployment, a skilled trade or a successful business;
• they owned between 3–10 hectares of land in the most productive
areas of the village, often with irrigation;
• farms might be semi-mechanized with a tractor, trailer, borewell,
threshing machine, car or lorry;
• they owned several oxen and/or buffalo; and
• they owned a large house or maybe more than one house.
These participatory wealth assessment focus groups determined
that on average, out of the 2,114 households present in the six villages,
65 per cent met the criteria for being either very poor (44 per cent) or
poor (21 per cent). Although the NGOs deliberately targeted the poor
in community mobilization, 15 per cent were in the lower-medium and
10 per cent were in each of the higher-medium and rich classes. With the
exception of Gabbur village, the ratios of the fi ve wealth categories to each
other were fairly similar across villages. Gabbur had a lower proportion of
very poor households, for reasons to be explored below.
Among the 18 sampled SHGs, 7 per cent of members were classifi ed
as being in the rich category and 11 per cent in the higher-medium group
(Figure 1). In most cases, wealthier participants were either relatives of
other members, and were often included because of their literacy or book-
keeping or other useful skills. For the lower-medium, poor and very poor
categories, the respective proportions were 22 per cent, 21 per cent and
FIGURE 1
Wealth categories of sampled self-help groups by village
ENVIRONMENT & URBANIZATION Vol 20 No 1 April 2008
154
39 per cent, respectively. Thus, statistically, the very poor group was slightly
under-represented relative to the make-up of the whole population, while
the lower-medium group was slightly over-represented. This under-
representation of the very poor was most notable in Gabbur, but the
converse was true in Kotur, where the very poor were over-represented
in the sample SHGs. When numbers of households in each wealth class
in the sample SHGs were compared (using the χ
2
test), with numbers
derived from the whole population, they did not differ signifi cantly
from expected, at α = 0.05. This indicates that, while deliberate targeting
of the poor and the very poor did not work, neither, on average, did the
SHGs discriminate against the poorer categories. Given that the very poor
and poorest sometimes display reluctance to commit to SHGs, the NGOs
may have been rather more successful than average in encouraging those
able to join groups to do so.
Other studies indicate that this pattern for SHGs is fairly typical in
India and beyond. Holvoet
(3)
describes similarly NGO-mediated groups in
Tamil Nadu, southern India, and reported that 76 per cent of microfi nance
clients globally are women. In the project described in this paper, 64 per
cent of groups were women’s groups. Premchander
(4)
describes a similar
pattern in southern Karnataka state, India.
Views vary as to the advisability of having mixed wealth classes in
SHGs. When discussing social capital in community groups, McCarthy
et al. stated that: “Heterogeneity in wealth, ethnicity and employment actually
increases network capacity, but generally leads to lower organizational capacity.”
(5)
They also argue that great heterogeneity in wealth may diminish the
capacity to establish common goals, as also reported by other observers.
(6)
In the study villages near Hubli–Dharwad, it was found that the human
capital that wealthier and better-educated members brought to SHGs
appeared to facilitate their functioning rather than lead to internal
divisions. These wealthier members often adopted responsible positions
such as secretary or treasurer within the groups, and experience indicated
that this was advantageous to the groups. The NGOs and the research
team also had to consider the longer-term sustainability of the groups
once the project funding had ended, and previous experience had taught
them that groups with mixed wealth and educational status endured the
test of time better.
As indicated in Table 1, Gabbur is an unoffi cial settlement falling
within the urban boundary. Several decades previously, villagers had
been relocated for health reasons to New Gabbur, two kilometres away,
when the city diverted the sewers into the local stream,
(7)
but they had to
cross the busy NH4 to reach their fi elds. Gradually, the villagers migrated
back and re-established the village of Old Gabbur. This gave them quite
a strong sense of social cohesion and, in such a small village, take-up of
SHG membership was very high; it would have been diffi cult to exclude
better-off people, particularly because the proportion of very poor in the
population was low compared to that in larger and more distant villages.
One reason why the proportion of very poor people was lower than in the
other fi ve villages is that many of the landless (traditionally the poorest
sector in rural India) were diversifying their livelihoods into dairying,
using buffalo, and were directly retailing milk house to house in nearby
Hubli, as reported by Brook et al.
(8)
This had the effect of moving many of
the landless out of the very poor and poor categories.
3. Holvoet, N (2005), “The
impact of microfi nance on
decision-making agency:
evidence from south India”,
Development and Change Vol
36, pages 75–102.
4. Premchander, S (2003),
“NGOs and local MFIs – how
to increase poverty reduction
through women’s small and
microenterprise”, Futures Vol
35, pages 361–378.
5. McCarthy, N, C Dutilly-
Diané and B Drabo (2004),
“Cooperation, collective
action and natural resources
management in Burkina Faso”,
Agricultural Systems Vol 82,
pages 233–255.
6. Agrawal, A (2001),
“Common property institutions
and sustainable governance of
resources”, World Development
Vol 29, pages 1649–1672; also
Place, F, G Kariuki, J Wangila,
P Kristjanson, A Makauki and
J Ndubi (2004), “Assessing the
factors underlying differences
in achievements of farmer
groups: methodological issues
and empirical fi ndings from the
highlands of Central Kenya”,
Agricultural Systems Vol 82,
pages 257–272.
7. As described by Bradford,
Brook and Hunshal (2003), see
reference 1.
8. Brook, R M, P Bhat and
A Nitturkar (2006), “Livelihoods
from dairying enterprises
for the landless in the
peri-urban interface around
Hubli–Dharwad, India”, in D F M
McGregor, D Simon and
MICROFINANCE FOR COMMUNITY DEVELOPMENT
155
Eighty-two per cent of sample SHG members were either landless or
marginal farmers (owning less than two acres, or 0.8 hectares). While
many of them undoubtedly were poor, clearly this 82 per cent is a greater
proportion than is accounted for by the very poor and poor categories
alone. This indicates that some of the wealthier groups also owned little
land (Figure 2). Nevertheless, despite the generally small areas of land
held, the great majority of sample members (69 per cent) still classifi ed
their main occupation as agriculture, agricultural labour or renewable
natural resource-related (Figure 3). This indicates that, despite the
proximity to the city, traditional occupation patterns still prevailed. How-
ever, a signifi cant proportion declared their primary occupation to be
outside the agricultural sector, which is indicative of the wider range of
employment opportunities afforded by proximity to urban centres. The
category of non-renewable natural resource (RNR) labour refers to manual
labour, typically in construction. In Mandihal, and to a lesser extent in
Mugad, many people worked in quarries that supply building stone, gravel
and road ballast. Many others were petty traders (microentrepreneurs) of
various descriptions.
A majority of SHG members (56 per cent) also declared a secondary
occupation. Of those who said that their main occupation was agriculture
(crop production), 21 per cent supplemented this with agricultural labour
on others’ land, indicating that their own land could not provide the
entire household’s income requirements. Agricultural labour is arduous
(often 10–12 hours work per day) and poorly paid (women were typically
FIGURE 2
Categories of land holding size by members of self-help groups
NOTE: 1 acre = 0.4 hectares
D A Thompson (editors),
The Peri-Urban Interface in
Developing Areas: Approaches
to Sustainable Natural and
Human Resource Use,
Earthscan, London,
pages 94–103.
ENVIRONMENT & URBANIZATION Vol 20 No 1 April 2008
156
paid Rs 25 per day, and men Rs 40).
(9)
On the other hand, 46 per cent had
non-RNR labour as a secondary occupation (particularly during the dry
season), and 10 per cent declared dairy production was their secondary
occupation. Of those who said that agricultural labour was their main occu-
pation, 73 per cent had no secondary occupation, indicating that they
were tied to their village, which prevented them from taking advantage
of the more remunerative occupations available in the nearby urban area.
Seventy-nine per cent of those whose primary occupation was agricultural
labour were classifi ed as being either poor or very poor, whereas for those
in the agriculture group (crop production), the corresponding fi gure was
49 per cent.
V. EFFECTS OF MICROFINANCE
Within this context, the two NGO partners implemented savings and
loans systems within each SHG. Members paid their weekly deposits
(typically Rs 10), and once the capital had built up suffi ciently, members
could then take out loans at a low interest rate (set by the group, but
usually 2 per cent per month). These loans had to be repaid before new
loans could be taken out. Consequently, and also due to internal group
social pressure, defaulting was rare (Figure 5). When each SHG had
accumulated suffi cient capital and members felt ready, a bank account
was opened. This stage was reached as quickly as possible to encourage
engagement with banking institutions and to provide a safe location for
each group’s capital. The banks considered that lending to a properly
constituted SHG was a worthwhile risk, and they were willing to lend.
FIGURE 3
Declared primary occupations of SHG members
9. UK£ 1 = approximately Rs 75.
MICROFINANCE FOR COMMUNITY DEVELOPMENT
157
SHG members took it in turns to visit the bank to deposit funds or to
make withdrawals, and for many, particularly women, this was their fi rst
encounter with the banking system. Previously, the banks had not been
considered by the poor and illiterate as suitable institutions for them, as
they were perceived as bureaucratic and unwilling to help those without
collateral. This perception changed dramatically during the life of the
project, as SHG members became familiar with banking procedures and
the advantages banks had to offer.
Approximately halfway through the project period (the exact timing
depended on the readiness of the SHGs), SHG federations were established
in each village. Each SHG elected two members to sit on an overseeing SHG,
called a mahasangha in BAIF-facilitated villages, or a village development
committee in IDS-facilitated villages. The role of these committees was to
ensure that SHGs functioned according to their by-laws, to resolve disputes,
and to sanction loans larger than an SHG’s own savings could fund.
Starting in April 2003, and again in April 2004, the project made available
UK£ 2,000 (Rs 150,000) as a revolving loan fund, to be shared each year
between the six participating villages and to be disbursed by these over-
seeing committees.
Over the three-year period, in the 18 SHGs being studied, 1,158 loans
with an aggregate value of Rs 1.6 million (approximately UK£ 21,300)
were made to 232 members, and 14 joint loans were made to small
groups within the SHGs (Table 2). Eleven members from the SHGs being
studied did not borrow any funds, although it is possible that households
within this group may have had a family member in one of the other
non-sampled SHGs. It is notable that 77.1 per cent of the funds raised
for loans came from members’ own subscriptions and the 2 per cent per
month interest levied on loans, which was added to the SHG capital held;
thus, the SHG system was a very effective means of redirecting fi nance
within the community. A further 14.3 per cent was raised from bank
loans, with the SHG raising the loan on behalf of individuals wishing to
borrow. These loans had the advantage of lower interest rates (typically
about half the rate levied by the SHGs), and members could take them out
before an existing SHG loan had been repaid, so they were more fl exible.
The revolving fund proved to be very successful, and the SHGs sampled
here took out slightly more than their fair share of the total of UK£ 4,000
made available. Once these loans are repaid to the overseeing SHG, they
will be available in perpetuity, beyond the life of the project. The mean
size of loans taken from these three sources was similar, with loans from
the revolving fund being slightly larger than those from the banks or the
TABLE 2
Source and size of loans (2001–2004)
Total
borrowed (Rs) Per cent of Mean loan
Source of loan 2001–2004 total size (Rs)
SHG 1,238,221 77.1% 1,289
Bank 229,500 14.3% 1,396
Revolving fund 137,600 8.6% 1,529
Total 1,605,321
ENVIRONMENT & URBANIZATION Vol 20 No 1 April 2008
158
SHGs. The smallest loans granted were for only Rs 100, a sum much too
small for a bank to contemplate lending. The largest was Rs 7,500, and
the mode was Rs 1,000.
As one of the objectives of the project was to facilitate the movement
of the poor and very poor out of poverty, it was of great interest to under-
stand the use this sector made of the easier availability of fi nance. Very
poor members took out an average of just over fi ve loans each (Table 3),
although some very poor members took out 14 or even 15 loans over
three years, repaying each one before a new one commenced (Figure 4).
However, their mean loan size was signifi cantly smaller than for other
wealth classes, indicating an unwillingness to overstretch their ability to
repay.
The wealth class that took most advantage of this microfi nance was
the poor group, with an average of more than seven loans taken per
member during the study period (Table 3), and an average loan size not
signifi cantly different from the wealthier classes. There was also a gender
dimension to borrowing, in that women’s groups took out 74 per cent of
the value of loans from SHGs and 82 per cent from the revolving funds,
a greater amount than their proportional representation. The rich class
did avail themselves of the microfi nance facility but took out fewest
loans, maybe because they had access to other sources of fi nance, or
possibly because they were the lowest priority within each SHG if funds
for loans were limited (although this is speculation, as we had no evid-
ence of this).
It has been reported that microfi nance made available by the more
formal microfi nance institutions, in the absence of facilitating agencies
such as NGOs, may exclude the poor and vulnerable.
(10)
In many countries
with frequently reported microfi nance programmes (the most famous
examples being the Grameen Bank in Bangladesh and the Bank Rakyat
Indonesia), the microfi nance organizations are often large, and granting
credit is their sole purpose. Shaw
(11)
and Amin et al.
(12)
examined some
aspects of such microfi nance institutions, which operate without the
agency inputs that NGOs provide. Amin et al.
(13)
concluded that the poor
were more likely to seek loans from a microfi nance institution than the
non-poor (in their study, these institutions were the Grameen Bank, the
TABLE 3
Effect of wealth class on mean size of loan and number of loans
taken per member (2001–2004)
Mean size of loan Mean number of loans
Wealth class (Rs) taken per member
Rich 1,598 5.08
Higher-medium 1,649 5.36
Lower-medium 1,347 5.25
Poor 1,346 7.60
Very poor 985 5.23
Probability 0.001 0.051
NOTE: Residuals of data were not normally distributed, therefore data were
logarithmically transformed prior to analysis (one-way analysis of variance).
Probability refers to the chance that the null hypothesis (that mean size or
number of loans did not differ between wealth classes) was rejected.
10. Amin, S, A S Rai and
G Topa (2003), “Does
microcredit reach the poor
and vulnerable? Evidence from
northern Bangladesh”, Journal
of Development Economics
Vol 70, pages 59–82; also
Shaw, J (2004), “Microenterprise
occupation and poverty
reduction in microfi nance
programmes: evidence from
Sri Lanka”, World Development
Vol 32, pages 1247–1264.
11. See reference 10, Shaw
(2004).
12. See reference 10, Amin
et al. (2003).
13. See reference 10, Amin
et al. (2003).
MICROFINANCE FOR COMMUNITY DEVELOPMENT
159
FIGURE 4
Number of loans taken per SHG member, including wealth class effects
Bangladesh Rural Advancement Committee (BRAC) and the Association
for Social Advancement (ASA)). These institutions were less successful
at reaching the vulnerable (and particularly the vulnerable and poor),
whom they defi ned as being households that were unable to perfectly
insure themselves in the event of a household-specifi c shock.
The current project (and others documented in India
(14)
) showed that
NGO involvement in the formation of SHGs presented a distinct advance
over the approach of microfi nance corporations in a number of respects.
Group-based savings and loans schemes can be established quickly in an
area (if there are no pre-existing microfi nance corporations); they can
be more fl exible with regard to the purpose for which loans are taken
(e.g. so-called “non-productive” purposes); and they are less bureaucratic,
which is important in cases where the poor and illiterate are intimidated
by formal institutions (as was the case in Hubli–Dharwad). However, the
question of whether the really poor can be engaged remains. The evid-
ence from the current study is that the poor and very poor who were
members did take advantage of microfi nance. However, the number of
poor and very poor joining SHGs was no greater than their proportion
in the general population of the six villages, so many either did not or
could not join SHGs, for reasons that were not rigorously determined.
However, anecdotal evidence suggested that the very poorest felt excluded
because they could not afford the Rs 10 weekly subscription, or they had
dependents that they could not leave in order to attend meetings.
The purposes for which loans were taken were recorded. These were
classifi ed broadly into agriculture (inputs for crop or livestock production),
14. See reference 3; also see
reference 4.
ENVIRONMENT & URBANIZATION Vol 20 No 1 April 2008
160
income-generating activities (IGAs, which also included investment in
agriculture to increase outputs) and non-IGAs (or consumptive loans,
such as smoothing out fl uctuations in household budgets, health or
school fees, and weddings). These were necessary to regularize household
affairs and reduce obligations to others. This pattern of development and
activity was also observed in other SHGs in India.
(15)
Figure 5 shows trends in the purposes of loans over three years. Loans
disbursed in the fi rst year were low, as new SHGs were formed, accumulated
savings and became accustomed to this new form of microfi nance. Sums
lent in 2003 and 2004 increased for all purposes, although loans for
agricultural production did not increase materially between 2003 and
2004 (although only ten months of the latter were included in this study).
The number of loans used for income generation (including agricultural
production) formed 51.2 per cent of the total. Loans for agriculture
accounted for 37.5 per cent of the total; those for non-agricultural but re-
newable natural resource-based income-generating activities (RNR IGAs)
(e.g. fruit or fl ower businesses) accounted for 2.9 per cent of the total;
and non-RNR IGAs (e.g. stocking small shops, bangle selling) accounted
for 10.8 per cent of all loans. This illustrates the point that despite their
peri-urban location, the majority of SHG members still wished to invest
in agriculture- or RNR-based livelihoods.
Almost half of all loans (48.8 per cent) were for “non-productive”
purposes. Predominant among these (and the largest single category of all
loans) was domestic consumption shortfalls (28.1 per cent of all loans).
Other purposes included: social events such as weddings; school fees and
medical bills; house improvements, such as repairs; legalizing “informal”
electricity connections; and in some cases, building extensions. Sur-
prisingly few (only six) were used to pay off money lenders,
(16)
maybe
FIGURE 5
Trends over time for quantity of SHG funds utilized for
agriculture, income-generating activities (IGAs) and
non-income activities (non-IGAs)
15. See reference 3; also see
reference 4; and Kumaran,
K (1997), “Self-help groups:
an alternative to institutional
credit to the poor: a case study
in Andhra Pradesh”, Journal
of Rural Development Vol 16,
Hyderabad, India,
pages 515–530.
16. The rule for SHG loans was
that a member had to pay off a
loan fully before another could
be taken out. Anecdotally, it
was found that some thought
this was infl exible and so took
out bank loans if they needed
more than one loan at a time.
These six members used their
SHG loans to pay off money
lenders, thus incurring a debt
with a much lower rate of
interest.
MICROFINANCE FOR COMMUNITY DEVELOPMENT
161
indicating that people used these sources of fi nance (at usurious rates of
interest, often 10 per cent per month) as a very last resort. Levels of debt
were not recorded in this research, although anecdotal evidence indicates
that SHG members reported payment of debt in kind, for example by
providing labour in lieu of cash. This fi nding emphasizes the importance
of not excluding “non-productive” loans in this system of microfi nance,
as happens with formal microfi nance institutions, which tend to lend only
for microentrepreneurial purposes. Regularizing household affairs may
allow the lender to engage in IGA activities, if freed from such domestic
anxieties. As found in other studies, the default level was very low, being
almost zero in 2002, and 4 per cent, 7 per cent and 8 per cent for IGA, non-
IGA and agriculture, respectively, in 2003. The outstanding amounts in
2004 were mostly on extant loans.
Identifying the different patterns among the villages was not a pri-
mary objective of this study, as the villages were so different from one
another. However, the pattern in the number of loans taken out per SHG
member (Figure 6) is noteworthy. The Gabbur and Mugad members took
out the greatest number of loans (individual loans only, excluding the
small number of within-SHG group loans). In Gabbur, there were two SHGs
in the sample, one women’s and one men’s, with a total of 37 members,
who took out 287 loans between them. Fifteen per cent (44 in number)
of these loans were for dairy production, often for buying new buffalo stock.
Mean loan size for dairy production was Rs 3,354, twice the average loan
size. Other important reasons for production loans were for buying fodder
(10 per cent) or buying stock for a fodder supply business (5 per cent).
As reported by Brook et al.,
(17)
dairying has proved to be an effective means
of moving poor people out of poverty, and Gabbur, with its near-urban
location, has a distinct advantage in this regard. For Gabbur, which was
new to NGO microfi nance facilitation at the start of the project, this re-
presents an enthusiastic adoption of this means of access to microcredit.
Mugad, on the other hand, had a much longer history of NGO activity,
FIGURE 6
Average number of loans per person, per village
17. See reference 8.
ENVIRONMENT & URBANIZATION Vol 20 No 1 April 2008
162
so high rates of loan uptake might not be surprising. These fi ndings from
Gabbur and Mugad may be compared to the other four villages, particularly
Kotur and Channapur, both new to this kind of NGO activity, and without
the great incentive to take up loans that dairying presented in Gabbur.
Although more research over a longer period is required for confi rmation,
these fi ndings may indicate that increased levels of uptake of this form of
microcredit occur where there is either a long history of NGOs offering
this service or where there is a readily identifi able commercial purpose for
small loans.
The SHG model of community mobilization and the increased avail-
ability of microfi nance had an effect upon livelihood strategies for the
majority of members, with 67 per cent reporting an additional occupation,
the expansion of an existing enterprise or a move to a new job. Of course,
changes also occurred that were not directly related to SHG loans, but
most of the changes reported were directly attributable to project effects.
Of those who reported change, 15.2 per cent started poultry enterprises,
and investment in new goat and dairy enterprises accounted for 14.6 per
cent and 10 per cent, respectively. In response to a marketing and micro-
enterprise development programme in Mugad village, 31 women set up
a soap powder-making business, at one point selling more than 250 kilo-
grammes per month. In addition to the new enterprises, 13 members
expanded their existing dairy enterprises and three enlarged their goat
and poultry businesses.
An independent impact study
(18)
of this project found that between
2001 (before the project) and 2005, mean household savings by poor SHG
members
(19)
increased by 647 per cent (from Rs 305 to Rs 2,278), while for
the non-poor, the increase was 126 per cent (from Rs 4,229 to Rs 9,547).
They found that household income had on average increased by 40 per
cent, and that the poor SHG participants, especially women, had been
catching up with the non-poor. Among poor households, the average
income had increased to above the state poverty line.
(20)
Specifi cally,
household income for poor SHG members increased by 52 per cent
between 2001 and 2004, and by 35 per cent for the non-poor.
(21)
VI. CONCLUSIONS
The formation of SHGs, primarily for the purpose of establishing informal
microcredit systems and mutual support and encouragement, was a
great success for the majority of those who became members. This was
undoubtedly aided by the peri-urban location of the project villages, which
signifi cantly assisted in the identifi cation and establishment of alternative
enterprises or the expansion of existing ones (such as dairying, goats and
poultry), as also found by Shaw
(22)
in Sri Lanka. It is very doubtful that the
development outputs of the project could have been achieved without
the agency of the NGO partners. New enterprises tended to refl ect the
existing agricultural expertise of the microentrepreneurs, unless particular
effort was expended in training participants to explore other non-natural
resource-based options. It was concluded that the NGO-mediated self-help
group model of community mobilization and microfi nance provision
was largely successful in terms in increasing social, human and fi nancial
capital.
18. ITAD (2005), Final Technical
Report, NRSP Impact
Assessment Case Studies – PU
Suite 1, PD 138, Report to DFID,
London, 123 pages.
19. Here, “poor” refers to the
wealth categories used by
the impact study, which were
approximately the same as
“poor” and “very poor” as
defi ned in this paper.
20. See reference 18, page 50.
21. These fi gures need to
be compared to Gross State
Domestic Product (GSDP) for
Karnataka for the period 2000–
01 to 2003–04. Agricultural
sector domestic product
shrunk to 69.4 per cent over
the four-year period (largely
due to a prolonged drought),
while per capita GSDP grew
by 6.9 per cent. Statistics were
sourced from the government
of Karnataka website, accessed
26 September 2007 at http://
des.kar.nic.in/SIP/sdp2.html.
22. See reference 10 Shaw,
(2004).
163
MICROFINANCE FOR COMMUNITY DEVELOPMENT
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