MICRO FINANCE-A NEW PARADIGM

By: R.Yuvarani

A new paradigm that emerges is that it is very critical to link poor to formal financial system, whatever the mechanism may be, if the goal of poverty allieviation has to be achieved. NGOs and CBOs have been involved in community development for long and the experience shows that they have been able to improve the quality of life of poor, if this is an indicator of development. The strengths and weaknesses of existing NGOs/CBOs and microfinance institutions in India indicate that despite their best of efforts they have not been able to link themselves with formal systems. It is desired that an intermediary institution is required between formal financial markets and grassroot. The intermediary should encompass the strengths of both formal financial systems and NGOs and CBOs and should be flexible to the needs of end users. There are, however, certain unresolved dilemmas regarding the nature of the intermediary institutions. There are arguments both for and against each structure. These dilemmas are very contextual and only strengthen the argument that no unique model is applicable for all situations. They have to be context specific.

Dilemmas

Community Based

Investor Owned

Community Managed
Community (self) financed
Integrated (social & finance)
Non profit / mutual benefit
Only for poor
'Self regulated'
Professionally managed
Accepting outside funds for on-lending
Minimalist (finance only)
For profit
For all under served clients
Externally regulated
The four pillars of microfinance credit system (Fig. 1) are supply, demand for finance, intermediation and regulation. Whatever may the model of the intermediary institution, the end situation is accessibility of finance to poor. The following tables indicate the existing and desired situation for each component.





DEMAND

Existing Situation

Desired Situation

fragmented
Undifferentiated
Addicted, corrupted by capital & subsidies
Communities not aware of rights and responsibilities
Organized
Differentiated (for consumption, housing)
Deaddicted from capital & subsidies
Aware of rights and responsibilities


SUPPLY

Existing Situation

Desired Situation

Grant based (Foreign/GOI)
Directed Credit - unwilling and corrupt
Not linked with mainstream
Mainly focussed for credit
Dominated
Regular fund sources (borrowings/deposits)
Demand responsive
Part of mainstream (banks/FIs)
Add savings and insurance
Reduce dominance of informal, unregulated suppliers


INTERMEDIATION

Existing Situation

Desired Situation

Non specialized
Not oriented to financial analysis
Non profit capital
Not linked to mainstream FIs
Not organized
Specialized in financial services
Thorough in financial analysis
For profit
Link up to FIs
Self regulating


REGULATION

Existing Situation

Desired Situation

Focussed on formal service providers (informal not regulated)
regulating the wrong things e.g. interest rates
Multiple and conflicting (FCRA, RBI, IT, ROC, MOF/FIPB, ROS/Commerce)
Negatively oriented
include/informal recognise e.g. SHGs
Regulate rules of game
Coherence and coordination across regulators
Enabling environment


R.Yuvarani, M.Phil Scholar, Department of commerce, Periyar University, Salem-11

Article Source: http://www.articlesbase.com/finance-articles/micro-financea-new-paradigm-1045611.html