That the existing Self Help Groups (SHGs) based micro-finance model has achieved remarkable successes is delivering both social and basic economic empowerment of women in many developing nations cannot be disputed. However, the prevailing model, especially in the government led micro-finance schemes, suffers from important limitations that come in the way of achieving goals that go beyond the modest initial objectives.
Here are four fundamental problems with the micro-finance based poverty eradication model of delivering development.
1. The rigidly structured (10-15 members and lack of flexibility with changing its composition and size) group account oriented micro-finance model does not have the required flexibility to accommodate the differential savings habits of members within the group. Since there is only one servicing account for the group, all the members generally save the same amount and equally share any benefits. Therefore, instead of need-based loan uptake, more often than not the loans are equally divided among the members and resultant sub-optimal utilization. This becomes critical, especially when the group has achieved a level of empowerment, and the differential credit needs of group memebers assumes importance.
2. In the absence of access to innovative and beneficial financial products, the SHG members may not be able to make the most efficient use of the inculcated savings habits and financial inclusion. In fact, currently the high opportunity cost (given the scarce income and multi-farious competing needs) thrift is being locked up in the low yielding savings bank account of the group. Unfortunately, even as the focus has been to get people to save and open bank accounts, important issues like the returns on their savings have been lost in the maze of priorities. Further, not enough attention has been paid towards leveraging the savings to minimize the risks associated with the universal and commonplace needs like health care and children's education.
3. The present arrangements also do not place the required premium on the vital forward and backward linkages like access to intermediates and capital goods, markets, and training required for making the most optimal use of the financing available for self-employment generation opportunities. It may be more appropriate if the financing, especially for starting new businesses or expanding existing ones, be bundled with all the required forward linkages.
4. It does not more explicitly acknowledge the reality that SHGs and microfinance are at best an entry-point activity that should be used to propel the group members into a higher growth trajectory. This would require that the groups leverage on the platform provided by the SHGs to access the formal institutions that support them and then its members get gradually equipped to chart out their fortunes independently. It needs to be acknowledged that while the strength of the group is an excellent platform to address the problems facing a group of poor people struggling to survive, it may not be the most efficient vehicle for addressing the challenges faced by those positioned to move up the economic ladder.