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The trend of transforming a public purpose, not for profit institution to a for-profit framework have shifted the strategic focus of Indian Microfinance from serving poor borrowers to earning profits for the promoters. As some of the large microfinance institutions [MFIs] ready themselves to hit the capital market with their unbelievable valuations and the promise of deliverance, it might be important to reflect on the origins of these MFIs, examine the process of their transformation and discuss some basic structural issues that are plaguing the microfinance sector in general and large organizations in particular. For the purpose of this paper, the definition of microfinance is restricted to "access to microcredit services that is being provided by for-profit entities on commercial terms" for most of the conclusions that are derived. Thus we shall not be discussing a large community based self-help group model of microfinance, while putting on record the acknowledgement that such a model also has made significant contributions in providing access to financial services.
The purpose of this study is threefold. First, the paper deals with the transformation needs of an early MFI (public purpose) model to the present commercial (for profit) transformation along with the transformation process. Second the paper further proceeds to explore the balance that the commercial Microfinance Institutions are working towards serving the underprivileged (poor) and increasing the profitability so as to maximize the investor returns. Finally, it will critically look at the implications of large Commercial Microfinance in India and its effect on the personal enrichment of the promoters of MFI. By doing this, it intends to contribute to a better understanding of the factors critically affecting the commercial transformation of microfinance in India.
To understand key aspects of transformation needs of an early MFI(public purpose) model to the present commercial (for profit) transformation by reviewing the literature done in past and also studying the working papers which are currently been researched. This connects with the theoretical background of the research. For the analysis of MFI, the study of M-Cril, NABARD and relevant publication on the development of related area in the country is been studied. Also Interviews with experts in the area of micro finance is conducted. These interviews are semi-structured. Semi-structured interviewing
starts with more general questions and topics relevant to Micro finance especially related to the moral, ethical and governance implications of Commercial Microfinance in India. In some cases due to the sensitivity of the issue and special request of the interviewee the names of the interviewee are kept confidential.
First, part of the paper deals with the transformation needs of an early MFI (public purpose) model to the present commercial (for profit) transformation along with the transformation process.
In this section we examine the significant issues that trigger transformation of MFI ( not for profit) into commercial purpose( for profit). Nine out of ten largest MFI's are for profit. See Figure -1
Source :-M-Cril-Review Microfinance 2010
The specific issues on transformation will be discussed in the context of India only. The transformation process in India was faced with some of the following challenges.
The most significant issue that triggers a transformation is growth. Both promoters and providers of microfinance en counted this. Invariably, the promoters of microfinance found that the existing institutions are unwilling to provide finance at the same pace at which the providers expect them to provide finance. Working with the attitudes of these organisations is not an easy task. (Sriram, 2002)
Diversity of Services
A trigger for transformation is in the diversity of financial services offered. While in most cases credit is the trigger to start microfinance activities, MFI's soon realise the need to provide other support services. One service is risk mitigation. This is to be addressed to a combination of self-insurance, group insurance and re-insurance. Savings is one mechanism of self insurance. However when MFOs get into savings services, it is seen that the NGO format is not suited and they have to look at transformation options. (Sriram MS and Upadhyayula R 2004)
This issue is closely linked to the growth. Beyond a level of operations, the MFOs will have to seek external funds. Donor money can only start up a microfinance activity. Donors cannot be a sustainable source of funding. Then, the only alternatives left for the MFO would be to either seek investments or loans. If one were to be sustainable and grow, there is no option but to deal with mainstream institutions (Rhyne, 2001).
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