Thesis Proposal

Dissertation 2009
Microfinance and Urban Poor:
Case of Ahmedabad
Submitted by
Anuradha Naulakha
URP 0207
Guide Name: Dr. Darshini Mahadevia
Urban and Regional Planning
Faculty of Planning and Public Policy,
CEPT University

MICROFINANCE AND THE URBAN POOR: A CASE OF AHMEDABAD 10/11/2008
Anuradha Naulakha, URP 0207, Dissertation Proposal, Guide: Dr. Darshini Mahadevia

Introduction
What is Micro credit?
In developing countries, today, micro enterprise is making important contribution
to economic output and employment. Approximately 30% of employment in
underdeveloped and developing country is generated by informal sector and
about 18% by Small and medium sized enterprises (World Bank)
These small (micro) enterprises find it difficult to raise capital, as the lender
(institution or individual) may not find the return from such an investment as
profitable as compared to from investment in large enterprises. In addition,
investors are also skeptical about repayment from a small enterprise. To address
these challenges to small businesses, concept of Microcredit came into picture
which would cater to the large clientele in developing world.
Micro credit and Micro finance-Difference
Microcredit is the extension of very small loans (micro loans) to the unemployed,
to poor entrepreneurs and to others living in poverty who are not considered
bankable. These individuals lack collateral, steady employment and a verifiable
credit history and therefore cannot meet even the most minimal qualifications to
gain access to traditional credit. To ensure that the poor not only have access to
credit but other financial services, microcredit has expanded over the years to
include a variety of financial products such as savings, insurance, transfer
payments, and even micro-pensions. Hence, Microcredit is a part of microfinance,
which is the provision of a wider range of financial services to the very poor.
1
Microfinance and microcredit do not provide consumers with loans to simply
increase their consumption; instead, they provide loans for the specific purpose of
creating self-employment for the poor, thereby enabling the poor to build their own
microenterprises and move themselves out of poverty. In short, microfinance is an
income producing tool rather than a consumption aid.
Micro Finance
1
(Marge Magner, March 2007)

In essence microfinance is not very much different from the mainstream
commercial finance operations but because microfinance serves a totally different
client segment, which is poor, they have to address the challenges that arise from
their clients dire circumstances. Few challenges that any poor faces are health,
lack of housing, lack of education, access to basic necessities, and unexpected
threats such as natural disasters that endanger their lives. Influence of these
factors on individuals’ economic ability cannot be ignored. MFI Products focus on
these kinds of issues to reduce poverty. Some of the issues that have an impact
on poverty are:
Health:
Ill health and sickness are one of the few reasons why poor have not been able to
pull out of poverty. Death of a bread earner leaves the household helpless. Their
earning is limited and one member falling sick can make the household unstable.
Food security:
Food security may not be considered as an important factor because now we
mostly look at poor who are ready for microfinance and hunger is not main
concern. In cases such as Grameen bank’s Struggling Members Program
(commonly known as Beggars program) where the participant are from the
poorest class for who hunger is most critical issue. BRAC through their IGVGD
(Income Generation for Vulnerable Groups Development Program), which is a
collaboration with World Food Program seeks to provide food security to their
participants. IGVGD provides free grains and skill training for 18 months after
which participant in groups receive loans to fund their income generating
activities. BRAC also incorporates healthcare and family planning into its
products. Program has served 1.6 million women among whom two third have
been able to escape the absolute poverty
Education:
Education is a vital component of a microfinance service; it allows participants to
manage their growing income generating activities. In absence of appropriate
support and education it is seen that participant are unable to make financial
decisions and overtime are in danger of incurring losses forcing them back into

poverty. Provision for adult literacy and financial training are very important parts
of a microfinance product.
Housing:
Housing helps create asset for the poor. Investment in housing is investment in
business since poor women do work from home. Housing gives access to many
basic services to the poor.
Vulnerability:
Poor not only suffer from low incomes but also from severe and often sudden
dispossession. Certain events drive down their existing income levels E.g. illness,
death, theft of asset, marriage, etc. There are 3 factors that contribute to
vulnerability: structural factors, crisis factors, life-cycle factors. Then there are
other deprivations that make it difficult for poor to come out of poverty like
powerlessness, social inferiority, discrimination, gender issues, disability, old age.
Micro finance service providers in India:
1. Informal Sector: money lenders, pawnshops, loans from relatives,
friends,etc
2. NGO, MFI’s: these extend microfinance to poor by forming Groups. E.g
Grameen model (see JLG below)
3. SHG-Bank Linkages: could have an NGO as an intermediary. (See Self
help groups below). NABARD proposes to link 1 million SHG’s to banks by
2008.
The two models of group lending:
1. JLG (Joint liability group).
2. SHG (Self help group).
JLG (Joint Liability Group): Potential clients are asked by the MFI to organize
themselves into groups. The members individually make regular savings and take
regular loans. They each have individual savings and loan accounts. This model
is pioneered in Bangladesh and is based on Grameen bank model. The main
purpose of JLG is to facilitate mutual guaranteeing and execution of a joint liability

making members jointly liable for interest payment + loan repayment obtained
from MFI.
SHG: The group formation process may be facilitated by an NGO or by a bank
itself. Members start making individual savings and lend by earning interest
decided by the group. SHG opens a savings account with bank to deposit the
savings and soon qualifies to take loans. This loan is used by the group to
supplement its own funds for on lending to its members.
Relevance of Study:
India has nearly 400 million people living below or just above the poverty line.
Approximately, 75 million households need micro finance and of this, 15 million
are urban slum dwellers (Sriram 2002)
Microfinance claims to provide the poor an access to capital giving them
opportunity to climb the economic ladder. A close examination of few microfinance
operations around the world has indicated that very small fraction of poor who use
the microfinance products are able to uplift themselves from poverty, and even
those who do manage to escape poverty take 5 to 10 years at an average.
2
India is fast becoming one of the largest micro finance markets in the world even
then; the link between micro finance and poverty alleviation is not proven.
Impact assessment is necessary to understand the outreach and effectiveness of
micro finance in meeting development objectives. Also, it is important to understand
that Micro finance services are an instrument of development and not an end in
themselves. For most, if not all, actors in India-NGO’s, MFO’s, donors, even
bankers- Micro finance is not only about the efficient and sustainable delivery of
micro-financial services. The ultimate goal is to reduce poverty. Hence, it is
important to understand:
 What changes does microfinance lead to?
 Do they move poor people out of poverty?
 How are the various products contributing to poverty reduction?
 What are the impacts of Micro finance on-
 Income
2
Marge Magner, Microfinance a platform for social change, Grameen Bank Publication, March
2007

 Employment (male, female)
 empowerment of women
 asset creation
 housing
 reducing vulnerability
 education (Boys, Girls)
 Health
Research Question
Does micro finance lead to overall development and pull households out of poverty?
Aim
To assess the extent to which Microfinance reduces urban poverty
For this research, Ahmedabad has been selected as a case study. In
Ahmedabad, almost 26% of city’s population accounts for slum population.
Although quite a significant proportion of the poor is above the traditional poverty
line, they do suffer from other deprivations. The share of employment in informal
sector was 77% and it generated 47% of the total city income (CDP, Ahmedabad).
This means that the poor contribute to the economy of Ahmedabad as much as
the non-poor. But the poor do so without receiving the due economic or other civic
facilities or services at par with the non-poor.
Objectives
 To study the broad spectrum of microfinance products and services in the area
 To analyze the current living conditions of urban poor
 To measure impacts of various products on the poor with regards to Housing,
Income generation, health, education, employment, reducing vulnerability, etc
 To understand the time scale that is needed for any change to take place
Scope
The study area is limited to few identified slums in urban areas (Limited to
Ahmedabad)

Methodology
The Methodology is divided into 3 broad stages:
• Stage 1 of the research work will include an understanding of the existing
Microfinance products by meetings with the Microfinance institutions.
Consultation with different levels of stakeholders on their objectives and
priorities will be done and their impact hypothesis will be explored. Also,
the indicators that are relevant to them will be understood.
These meetings will also help in identifying the MFI beneficiaries who will
then be identified geographically. The locations with maximum
beneficiaries will be selected for further studies which will, then, lead to
identification of sample (clients) to be used for various analysis.
A number of meetings with MFI, at this stage, would be required. An
attempt to include different classes of poor and the impact of different
products on them will be made. For this purpose, Representative sampling
will be used here.
• Stage 2 is based on qualitative studies and analysis. Here the history of
interventions by MFI / Government in the study area and their Impacts
would be studied. The current living conditions of the clients will be
analyzed with help of case studies, focus group discussions, etc and if any
difference has occurred in recent past. i.e. ‘without microfinance’ and ‘with
microfinance’ differences for the clients will be studied. This stage will also
help understand the time frame that is required for any impact to happen.
This stage will include questionnaires, discussions with clients, perception
studies.
• Final stage will include quantitative measurements of the impacts of
microfinance on poverty reduction. Here, comparison between certain
indicators (based on products) for the Clients and a “control group” of non-
clients will be studied.
Data will be analysed through cross tabulation and statistical tools such as
regression analysis, etc.

Possible chapters
1. Introduction
 Need of the study
 Aim, Objectives, scope, Methodology
2. Review of Existing Policy situations and institutional structure
 Existing governmental policies
 Existing MFI: their background and what they do, study of existing
products
3. Introduction to the City and existing poverty situation
4. Findings from surveys
 Impact of mf on economic conditions
 Impact of mf on the living conditions
5. Conclusion and recommendations
References:
• Anderson, Lykke Eg, "Micro credit and Group Lending: The collateral Effect." Institute
for Socio-Economic Research
• Kota, Ina, "Microfinance: Banking for the Poor", Finance and Development, 2007
• Magner, Marge, "Microfinance a platform for social change", Grameen bank, 2007
• Mitra, Subrata Kumar, "Asking Price of Microfinance loan to poor borrowers", Vol.
Paper no. 191, Institute of Rural Managemnet, Anand
• Mosley, David Hulme and Paul, "Finance Against Poverty", Vol. 1. London and New
York: Routledge, 1996
• "Role of Micro Finance for poor", FWWB
• Sriram, Thomas Fisher and M.S, "Beyond Micro Credit: Putting Development back into
Micro Finance", New Delhi: Vistaar Publications, 2002
• Yunus, Muhammad with Alan Jolis, "Banker to the Poor: The story of the Grameen
Bank", London: Penguin Group, 2007
• AMC and AUDA with CEPT University, "City Development Plan", Ahmedabad:
JNNURM, 2006-12

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