Udai Microfinance Project

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This is the online collaboration space for the Udai microfinance project. We want to understand the intricacies of microfinance operations, especially in the context of India. There is much controversy surrounding microfinance, and the aim of this project is to scientifically analyze the strengths and weaknesses of microfinance, so that Udai can help MFIs improvise their processes to make a greater impact in reducing poverty and improving efficiencies.


Microfinance: Pros and Cons


Poverty is modeled as a vicious cycle: A poor person or family remains poor because their poverty itself makes it difficult for them to avail the basic means of breaking out of this cycle. For example, education is one such means through which a poor person can improve his productivity and break the poverty cycle, but he is unable to afford education because of his poverty. Similarly, overcoming poor health and malnutrition are other methods, but which are again unaffordable by the poor. Information and communication technologies are yet another means to increase awareness and improve business processes to help break out of the poverty cycle, but these are not affordable by all. The key word here is affordable. Economics has evolved over the ages such that almost all services are now tradable through money; affordability means having access to capital to be able to buy these services. Which of these services should be categorized as tradable or as being a fundamental right of people, is a debatable issue. The proponents of microfinance are of the opinion that irrespective of what governments of different countries consider as fundamental rights or not, since today's economy is capital driven, the answer to poverty eradication has to lie in having access to capital.

Microfinance refers to exactly this: Providing financial services for the poor, including savings, credit, insurance, and other financial instruments that mobilize capital and make it easier for the poor to afford other basic services.

Microfinance started as an experiment in the 1970s, and there are now innumerable stories of how it has helped the poor. In fact, it has been termed as the most important phenomenon since capitalism! The unique feature of microfinance as opposed to most other methods for poverty eradication, is that it is financially sustainable. This means that it can be scaled many times over to reach out to the 3 billion people of the world who constitute what is called the bottom of the pyramid. And if these success stories are not just spotty and anecdotal, then microfinance can actually help these 3 billion people break the cycle of poverty.

A talk by Vinod Khosla brings out the essence of microfinance very well: Microfinance: Enabling the Power of Ideas and Entrepreneurial Energy for the Other Half


Microcredit is the most debated component of microfinance. A very comprehensive article by Thomas Dichter (author of Despite Good Intentions: Why Development Assistance to the Third World has Failed) talks about this in detail: Hype and Hope: The Worrisome State of the Microcredit Movement. To summarize, microcredit is typically cited as fueling the entrepreneurial energies of the poor: Access to credit without any collateral helps the people start their own microenterprises, or scale their existing businesses, thus increasing the returns to a business activity. This article claims that most often microcredit is not used for entrepreneurial activities, but to just smoothen out economic ups and downs in a poor family. Even if it is used for businesses, the success stories are mainly of those people who were entrepreneurial from the start and were already running some business or another. In other cases, the developmental impact it produces is questionable and it can even be counter-productive sometimes.

The question is that even if it is assumed that microcredit builds confidence and helps the poor overcome times of crisis, is it anything more than a channel to distribute aid to the poor? Because if it just a distribution channel, then as the hype builds up and more governments get into microcredit, there will hardly be any difference of this approach from the traditional top-down aid distribution process that has come under heavy criticism because of corruption. Of course, this is an extreme viewpoint and must be taken with a grain of salt, considering that it is coming from Dichter who wrote about why development assistance has failed so far! But the points still remain valid. For example, if microcredit helps only those poor people who are already entrepreneurs, then it is better to give them larger loans and simulatenously develop laws and institutions so that other poor people can somehow be brought into the loop. If most other people use microcredit to overcome times of crisis, then processes for savings or insurance should instead be put into place. This will lead to a more efficient utilization of resources and capital.

Our goal

Scientifically analyze the processes/aspects of microfinance and apply our understanding to help MFIs increase their impact in reducing poverty and improving efficiencies.

Key learnings

==Components of microfinance== [1]

  • Savings: a service where small sums of money are deposited without any minimum balance requirements allowing individuals to save for unexpected expenses and future investments.
  • Credit: is a small of amount of money that is loaned to an individual or group through banks and other institutions without any collaterals
  • Insurance: is a system where payment on risk is shared amongst individuals, businesses and other organizations. This allows individuals to concentrate their energies on development of businesses while mitigating other factors affected by risk such as health, property or ability to work [2]
  • Others: Remittances

Microfinance institutions and models

A comprehensive survey of MFIs in India and around the world is required

  • How do MFIs get their funding
  • What activities do they undertake
  • Methods for SHG formation, entrepreneur selection
  • Customer and borrower profiles: educational qualifications, income levels, size of household, etc
  • Extent of training that is provided
  • How are interest rates determined

Microenterprises: Evaluation and Impact assessment

  • How is the performance of an MFI graded over time
  • What parameters can be used for evaluating MFIs in different contexts
  • Cost requirements
  • How is the performance of a microenterprise graded over time
  • Success rates

Microenterprises: Why do they fail or underperform

  • What situations constitute failure of a ME?
  • What situations constitute failure of a MFI?
  • Common reasons for failure, contextual factors
  • What are the method of alleviating the problems faced by MFIs?
  • New mechanisms for fine grained tracking, different mechanisms for different microenterprises


One of the aims of this project is also to analyze the data provided to us by Kudumbashree (KuSh) about various Microenterprises (ME) operating in Kerala in various sectors of the economy. We shall also attempt to analyze trends, patterns, anomalies for different categories of MEs, as detailed as possible. This page documents all the relevant literature review and data analysis aspects that are needed for the KuSh database. Also all the results of the analysis have been documented.

Proposed deliverables for KuSh project:

  • Study of KuSh model for microfinance: Identify strong points, possible shortcomings and improvements, based on comprehensive survey of MFIs, evalauation parameters, and impact assessments
  • Relate theoretical estimates with the actual results obtained from the MESurvey database and identify how well the established parameters can help analyze the KuSh database. Also identify anomalies and get advice from them on possible reasons
  • Prepare a white paper to be submitted to KuSh reagrding our findings, and any improvements that we can suggest for making the process of selecting and evaluating MEs and data mangement system more smoother
  • Also help KuSh with technical help for the Recovery Information System and State wide survey to be shortly launched.

Literature Survey

The above page contains reading material for the Microfinance relating to various factors and aspects of MFI including, not limited to:

  • Components of MFI (What is MFI, Microinsurance etc)
  • Survey of MFIs around the world: their models, eligibility criteria, evaluation parameters, impact assessment
  • Evaluation of MFIs: How to evaluate diff. types of MFIs, what paramters to look for, how to ensure relevance, validity and practicality
  • Various issues/problems faced by MFIs, and try to analyze them, based on above reading


Please add your name whenever you've read a paper, and write a sentence or two about it over here if you don't want to reference it in the text above.

[3] V. Khosla, "Microfinance: Enabling the Power of Ideas and Entrepreneurial Energy for the Other Half," 2004.

[4] T. Dichter, "Hype and Hope: The Worrisome State of the Microcredit Movement," 2006.


[5] EDA Rural Systems, "Self Help Groups in India: A Study of the Lights and Shades," 2006.

[6] G. Hirsch, J. Rosengard, G. Stuart, D. Johnston, "Symbanc: A Simulator for Microfinance Institutions," Finance for the Poor, Dec 2005.

[7] A. Karnani, "Jobs, not Microcredit, is the solution,", 2006.

(Adi) -- This article reaffirms [Dichter, 2006]. It is better to give a $5000 loan to a garment manufacturer and help him employ 50 people, rather than give a $100 loan to the 50 people. Does this mean that capitalism is good?

[8] Oldsman, Hallberg, "Framework for evaluating the impact of small enterprise initiatives", 2002

(Sri) -- Various ways of evaluating impact of MEs. Diff points of view like NGO, beneficiary, overall disctrict etc, and other factors to be considered whenever evalauting an ME

http://www.gdrc.org/icm/conceptpaper-india.html -- Microfinance Institutions in India microfinance, improvements, India, HDFC

[9] Kudumbashree: Concept, Organization and Activities.

(Bala) -- This is a must read for understanding Kudumbashree. This demonstrates the breadth of activities that are required to alleviate poverty.

(Eric) Goetz, A.M. and R. Sen Gupta. "Who takes the Credit? Gender, power and control over loan use in rural credit programmes in Bangladesh." World Development Vol. 24, January 1995

[10] The microcredit debate

(Adi) -- Has lots of good links

[11] Learning from failures in microfinance: what unsuccessful cases tell us about how group-based programs work

[12] ACPSP: Gender Equality Network

Meeting time

Mon: 11:00 - 5:00

Tue: 11:00 - 5:00

Wed: 2:00 - 4:30

Thu: 11:00 - 5:00

Fri: 1:30 - 2:30

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