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Microfinance challenges: empowerment or disempowerment of the poor?

Isabelle Guérin
Jane Palier

Part II - Microfinance in its environment

12. Microfinance technology and linkages with non-financial services

Arun Raste

Texte intégral

  • 145 Editor’s note: this definition, used by the Indian authorities, is based on the level of investment (...)

1India is a country of paradoxes. Globally, it is ranked 11 for total Gross Domestic Product (GDP), yet millions of people in the country struggle in poverty. For the majority of poor people, employment is not guaranteed, and each day, many are forced to hunt for some paid employment. Seventy per cent of the poor live in villages where their only source of employment is either shift cultivation, or the collection of minor forest products. Trading relationships are exploitative, wages are low, and skills remain unrecognised. It is usually accepted that approximately 90% of the nonagricultural workforce is in the informal sector, with little access to financial services or social protection (Deshpande et al. 2004). Large numbers of people are dependent on incomes from the informal sector, especially in small and micro-enterprises (SMEs)145. Even though it is difficult to get precise data, it is fairly evident that SMEs are responsible for over 80% of the employment in India (Kundu and Sharma 2001).

2The microfinance movement in India has accelerated rapidly in the past decade and has been effectively fulfilling the financial needs of thousands of poor people, who were earlier deprived of getting loans from formal sources. Nobody can deny that such small loans have helped borrowers, including SMEs, to marginally increase their income. However, those micro-enterprises are hardly ever sustainable. More and more micro-practitioners are realising that credit alone is not enough to tap the full economic potential of the micro-enterprise sector. Access to markets, information on raw materials and technology, skill upgradation, design inputs, and a range of other business development services are equally significant in making micro-enterprises more profitable and sustainable. Equally important is the proper identification of potential activities through a scientific and systematic process. SMEs are probably the first to suffer from the “social costs” of globalisation, which has raised more challenges to those already marginalised (Deshpande et al. 2004), and there is an urgent need to elaborate and implement strategies that will help them take over the market instead of being subjected to its pressures. In this context, this paper does not pretend to give any solutions or “best practices”, but contents itself by raising a number of assumptions.

1. Challenges posed by globalisation

3New technologies and global competition have highlighted the importance of SMEs. Corporate downsizing has become common and as larger corporations reduce their business operations and focus on core competencies, whole lines of businesses and functions are being outsourced or abandoned. This has created extensive new business opportunities for smaller firms, including micro-enterprises. The SME sector has benefited from this because manufacturing operations have been shifting to countries such as India.

4The market mechanism is changing, with markets becoming complex, more segregated, uncertain and volatile. Brand names dominate markets and become global players. Brand owners control the market and determine the production structure around the world. Global buyers require speedy reactions, and demand fast delivery and technological changes. Not many SMEs can cope with this speed. Location advantages are increasingly becoming less relevant as it does not matter where the product is being produced. Buyers can always find producers everywhere and trade in all parts of the world.

5At the same time, globalisation is rendering unsustainable the self-employment activities that microcredit programmes promote (i.e. SMEs promoted by SHGs). For them to be viable, they need to be part of a larger development agenda that includes linkages to product markets, local government programmes and community development.

Figure 1. Empowerment: a combination of finance and non-financial services

Figure 1. Empowerment: a combination of finance and non-financial services

6A baseline study of pro-poor SMEs in western India conducted by the International Resource Centre for Fair Trade (IRFT) and Traidcraft indicated that the growth of SMEs is hindered by lack of business skills and problems over accessing markets (Tiwar and Joshi 2002). They remain excluded from any business development services (BDS), and therefore the producers they work with remain poor and marginalised. Most are limited to selling their products in local markets that are overcrowded and competitive, and characterised by barriers to entry and low profit margins. In the agriculture sector, it is well known that small producers are condemned to depend on middlemen and hardly manage to access markets beyond the local level. The value chain of the cashewnut, given below (figure 2), shows that there is an inverse proportion between the price paid to the producer and the number of intermediaries involved in the transaction. The SMEs lack access to resources, which could help them improve productivity and quality and thereby demand. Normally, SMEs draw upon personal networks to assist with their business needs, often with ineffective results.

Figure 2. Marketing difficulties faced by small producers: the example of the value chain for finished cashew nut

Figure 2. Marketing difficulties faced by small producers: the example of the value chain for finished cashew nut

Note: Final price to the consumer varies between Rs.200-350 a kg. Parameters such as moisture loss, broken cashew production, cashew shell, interest on working capital towards stocks etc. have not been considered in the above depiction.
Source: IRCFT (2004a).

7In 2002, Traidcraft and IRFT conducted another study to explore the nature and spread of SME clusters (Joshi 2002). These clusters are sectoral and geographical concentration of enterprises, in particular SMEs, faced with common opportunities and threats, which can: a) give rise to external economies (i.e. specialised suppliers of raw materials, components and machinery; sector specific skills etc.); b) favour the emergence of specialised technical, administrative and financial services; c) create a conducive ground for the development of inter-firm cooperation and specialisation as well as of cooperation among public and private local institutions to promote local production, innovation and collective learning.

Table 1. SME Clusters


Number of SME Clusters





Andhra Pradesh






Tamil Nadu




Source: Joshi (2002).

8It is estimated that SME clusters and rural and artisan-based clusters contribute to almost 40% of the employment in the Indian manufacturing industry alone. The study also indicated that SMEs contributed 78% to employment in the non-factory sector and 40% in rural areas, as against big businesses (Joshi 2002). India’s competitive prices make it attractive to a wide range of companies internationally. However, there have been difficulties in working with SMEs because of actual or perceived problems of communication, regulations, quality assurance requirements, and logistics.

9Other studies related to SMEs have similar findings and indicate that the problems they face include (Sriram and Phansalkar 2001):

  • Inability to cope with sudden/unseasonal/unplanned demand

  • Lack of market information

  • Lack of access to resources

  • Insufficient business expertise

  • Little understanding of the market targetted

  • Inconsistent quality

  • Difficulty in meeting market demands

  • Difficulties in dealing with export regulations and documentation

  • No access to appropriate product development & design support

2. Intervention strategies

10The starting point for the design of any intervention intended to promote SME development is an assessment of their needs and perceptions. These include demand-side factors, such as geographical situation, consumer attitudes, purchasing power, politics and governance, as well as supply-side factors, which besides credit, includes networks, access to resources, infrastructure, availability of information and government regulations and policies.

11Given the size and importance of the SME sector to an economy like India, the potential demand for effective BDS is vast; however, effective demand is still weak, and supply capabilities correspondingly underdeveloped. In the recent years, the range of services that were supported widened substantially to include individual counselling, facilitation of market access, development of networks and clustering, and provision of information in a variety of areas, such as equipment, technology and markets, as well as physical facilities and shared services.

12Considerable opportunities exist to offer services through a variety of channels, including private intermediaries and non-governmental organisations (NGOs), such as market information, trade facilitation/marketing support, business counselling/business planning, product development and design, financial management and attitude building. The availability of quality BDS services at affordable prices is also an issue that needs to be addressed.

13Other issues identified include: The need for BDS to provide the necessary support to SMEs; for enterprises to respond swiftly to globalisation, including information and capacity building; and the need for locating local and domestic markets, rather than focusing on export markets, which are beyond their capacity.

14Supply-side issues related to BDS have generally received far more attention than the demand-side. Programmes for supplying BDS have frequently been formulated with little attention paid to determining the existing or potential demand of SME clients. As a result, programmes have failed to involve potential clients or, when cost recovery was an issue, unable to generate revenues through client fees or contributions.

3. Fair trade – An option for better living

15Fair Trade is an instrument for achieving sustainable development, defined by the United Nations Development Programme as a process that enables all people to realise their potential and to improve their quality of life in ways that protect and enhance the Earth’s life support systems. SMEs can easily shift to Fair Trade and cooperate with Fair Trade organisations. Fair Trade provides a model for SME responsibility because it encourages SMEs to engage with stakeholders throughout the value chain, understand the supplier, conduct their business in the community context, not in isolation from the community, understand business risks, adopt transparent communications, maintain a pricing policy to cover the cost of labour and capital employed, develop partnering relationships and integrate social objectives with other buying functions.

16In India, the concept of fair trade is just starting to be well known. A number of initiatives supported are given in the box and the table below.

Box 1. Fair Trade: a case study

  • 146 An acronym for a State government programme called Development of Women and Children in Rural Areas

To meet the demand for a reliable Organic and Fairtrade cotton fibre, Agrocel Industries Limited, in conjunction with Vericott Ltd and Traidcraft Exchange, have defined and branded a cotton fibre, Agrocel® Pure & Fair Indian Organic Cotton. Agrocel, from its 12 rural service centres across India, co-ordinates organic fibre cultivation with a selected group of local farmers. A team of agronomists is based at each Agrocel service centre, and monitors growing to international organic standards.
In Vellore, Tamil Nadu, SHARE is another example of handicrafts fair trade. Its mission is “to bring in all-round development to the neglected and downtrodden section of the population in the villages” through women’s empowerment and solidarity. SHARE was registered as a company in 1991 but has been working as a cooperative in this area since the 1970s. SHARE has village handicraft production centres, primarily palm and coir, in more than 30 villages and employs over 3,000 women. It is a hybrid between a traditional handicraft producer cooperative and an activist organisation. SHARE solicits orders for crafts, arranges for raw material provides advanced craft training, and comes up with new designs for crafts, which are produced in centres in each village. 75% of the products are for export purposes. International organisations involved in “Fair Trade” such as Oxfam, U. K., Trade Craft-U. K. etc. are typical customers, placing orders for craft items and then selling it in their countries through catalogues. In addition, through a combination of its own profits and funds raised from international groups, it offers other services such as balwadis, scholarships, and so on.
In Gujarat, the Banascraft programme aims to empower the craftswomen of Banaskantha by allowing them to earn a livelihood by making handicrafts. The programme is designed to help them work for their collective benefit, to improve the socio-economic position of artisans and their families. The project started in 1989, with the formation of groups of local women into the Banaskantha DWCRA
146 Mahila SEWA Association, on the basis of traditional craft specialisation. Different caste and tribal groups in specific villages in the taluks (sub-districts) of Radhanpur, Santalpur, Harij, Diyodar, Tharad, and Kanakre, produce particular types of textilerelated crafts, including embroidery, mirrorwork, patchwork, weaving, and beadwork. Banascraft provides a broad, integrated range of overlapping BDS, which are divided into four broad areas for the purposes of analysis:
1) Organisation and capacity building: assisting women to form village craft groups, pool financial resources, and integrate the groups into the larger Banascraft organisation; helping members access government services; and encouraging participation in appropriate government programmes.
2) Product development: helping craftswomen to use new manufacturing techniques, designs and raw materials.
3) Training: teaching and upgrading both business and technical skills to improve efficiency and commercial competitiveness.
4) Marketing: Banascraft’s core service, involving the provision of market information, linkages, transport services and the fair trade label.
Banascraft helps craftswomen market their products both locally and in urban markets in India and abroad, through retail and wholesale channels. The crafts are marketed through the Banascraft store in Ahmedabad (Gujarat’s largest city, where SEWA is headquartered), and also sold through bazaars and exhibitions. Craftswomen show their wares at festivals and trade shows, as well as exhibitions in Delhi, Chennai, Mumbai, Bangalore, and Pune. Several women recently attended trade shows in France and are planning to visit New York for an upcoming craft show there. Banascraft also promotes its members’ crafts through customer discounts, print advertising, television commercials, special festival promotions, and exhibits in major hotels and tourist destinations. In each case, Banascraft facilitates sales in exchange for a 10% share of the final selling price. According to the statistics of the organisation, the Banascraft programme covers more than 10,000 artisans and is composed of 300 local groups.

Table 2. Fair trade experiments in India

Domestic market

Export market

Name of buyer

Types of products

Name of buyer

Types of products

Apna Bazaar


Aspire Group, U. K.

Jute and other handicrafts products

Mumbai Madhyavarti Grahak Sangh

Mango chutney, Mango pulp

El Puente, Germany


V. P. Bedekar & Sons

Raw mango slices

Cora Kemperman, Netherlands

Organic cotton

Fab India

Curtains, pillow covers

Shriram, Prajapati, Nepal

Organic cotton

Neon Group

Organic cotton



Source: IRCFT (2004a).

4. Why do we need BDS services?

17The provision of BDS services to SMEs could promote economic empowerment of marginalised communities and enterprises, to enable them to work successfully within the value chain, and increase their ability to negotiate in the marketplace. In theory, effective BDS Services should ensure the following effects:

18• Reduction in business related problems:

19Theoretically, the range of services that a BDS provider would offers should help to reduce the gap between supply and demand, by making changes at the supply end of the chain. This could result in sustainable and increased income for SMEs, by increasing the profile of SMEs in the marketplace and also their confidence to negotiate terms of trade equitably.

20 Increased productivity

21Any productivity enhancement increases the incomes of producers/artisans/entrepreneurs, and would have a direct impact on poverty.

22• Sustainable livelihoods

23BDS services improve the quality of the products, which would lead to better prices, and increased sales. Particularly in rural areas, where people are entirely dependent on seasonal agriculture, such intervention would enable a source of supplementary income either through product processing (value addition) and/or through the promotion of traditional crafts, thereby increasing the number of days employed in the year.

24• Increased income/surplus generation

25While increased income does not necessarily mean surplus income (since many of the people covered live near or below the poverty line), this is one of the objectives of working with marginalised enterprises. For beneficiaries who live below the poverty line, it may not convert into surplus, but increase income. However, with sustained productivity and increasing sales, an enterprise can reach the break-even point faster.

Box 2. Helping women to access information: the “telephone ladies” of Grameen Bank in Bangladesh

The experience of the “telephone ladies” of the Grameen Bank demonstrates that it is possible to increase economic returns to poor people by changing nothing more than their access to information about market prices. Grameen Telecom provides commercial phone service in rural areas of Bangladesh through local entrepreneurs. Grameen members, mostly women, many of them illiterate, take loans to buy and operate cellular telephones, charging villagers by the minute for calls. Fifty per cent of the calls are made by poor people, mainly for economic reasons; these include checking out the current price of goods before a meeting with a purchaser, finding prices in various markets before deciding where to go to sell goods, and consulting with doctors and medicine providers. It is estimated that the phones generate real savings of between $ 2.70 and $ 10.00 for calls, which substitute for travel between villages and Dhaka, the capital. The telephone women are able to repay loans in a year, and they call the telephones a more reliable investment than cows.

26• Bridging demand supply gap

27A key problem for SMEs is the information on demand and supply. Therefore though the skills are present, products are linked to cultural traditions alone, sold within local markets. For many, demand for their products is decreasing, as choices for consumers increase (better quality at cheaper prices). BDS services would help to connect enterprises with the market and consequently convert skills into products that the market wants. Product development and design activity should be an important aspect of the intervention, supported by market awareness and sales tours, multiple channels to market, and value addition where feasible and sustainable.

28• Capacity to negotiate with other elements in the supply chain

29BDS services help producers, artisans and entrepreneurs to understand the supply and value chains in which they trade. The value chain analysis will help understand the ‘big’ picture beyond the immediate trading relationships, build economies of scale and develop more confidence to respond to pressure points.

30• Purchasing capacity and increased consumption levels

31Finally, it is likely that all the impact areas mentioned above would have a positive impact on purchasing capacity and consumption levels, which are important for improving the quality of life of the poor.

5. Development of common facilities and flexibility

32The key challenge in providing market-oriented business support services to micro and small entrepreneurs is helping them to overcome the disadvantages of being small, scattered, and unorganised. Various linking strategies have emerged to provide services to support micro-enterprises and SMEs, including the formation of networks and associations, business clusters, franchising, leasing, subcontracting, and business incubators.

Box 3. Formation of business clusters: an example of Jaipur

When a large concentration of small businesses compete with each other, unable to break into new markets or improve product design, competition drives down prices and can lead to self-exploitation strategies. In this environment, a cluster approach to DBS services can be a viable option to achieve collective efficiency. This also enables the adoption of common marketing opportunities and economies of scale. The best-known examples of these small business clusters are found in northern Italy.
In Jaipur, Rajasthan, famous for its ethnic hand-block print fabric, a UNIDO-supported intervention helped 500 small firms to employ 10,000 workers to increase their profitability, improve their product quality, and access new export markets by pursuing a cluster strategy. The first steps were to increase communication, build trust, analyse problems, and develop a common vision of problems, which needed collective action. Over time, this led to the revitalisation of a dormant artisan association, the Calico Printers Co-operative Society; this in turn led to the creation of a common showroom and an independent consortium of textile exporters. Service providers such as the National Institute of Fashion Technology have stepped in to provide fashion design advice, a credit scheme has been extended through the Small Industries Development Bank of India, and a market is gradually developing for consulting on export strategies, Internet technology, bulk purchasing, and product marketing for small enterprises.


33Though credit helps in increasing the income levels of the beneficiaries to a certain extent, credit alone is not enough to tap the full economic potential of the micro-enterprise sector. Sustainability is a big issue for SHGs and SMEs. From observation, it was clear that on an average hardly 10-15% of the households in a group graduate to micro-enterprise development in the poorer regions. Moreover, any new micro-enterprise takes on an average 10 years to stabilise. For all these reasons a key challenge is to complete microfinance services with a diversity of non-financial services. BDS services that take into account the demand and the supply side, marketing arrangements such as fair trade, and clusters of SMEs, are some of the strategies that might help in this direction.


145 Editor’s note: this definition, used by the Indian authorities, is based on the level of investment in plant, machinery or other fixed assets, whether held on an ownership, lease or hire purchase basis. It seeks to keep in view the socioeconomic environment in India, where capital is scarce and labour is abundant.

146 An acronym for a State government programme called Development of Women and Children in Rural Areas.

Table des illustrations

Titre Figure 1. Empowerment: a combination of finance and non-financial services
Fichier image/jpeg, 80k
Titre Figure 2. Marketing difficulties faced by small producers: the example of the value chain for finished cashew nut
Légende Note: Final price to the consumer varies between Rs.200-350 a kg. Parameters such as moisture loss, broken cashew production, cashew shell, interest on working capital towards stocks etc. have not been considered in the above depiction.Source: IRCFT (2004a).
Fichier image/jpeg, 174k


Director of International Resource Centre for Fair Trade (India)

© Institut Français de Pondichéry, 2005

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