Recent innovations in micro-finance and the role of social auditing: An in-depth study of the issues and challenges faced by the various entities in the micro-finance sector and a possible fix-all business model

Abstract

Microfinance is now as important as mainstream banking. The present outreach is 2.2 million selfhelp groups (SHGs) covering 33 million poor families, and a cumulative disbursement of Rs 22,000 crore. The annual growth rate of the industry is about 70 per cent. The actual availability of funds is only a fraction of demand, leaving a huge gap. The robust banking sector of our country failed to provide integrated micro-financial services (including micro-credit and insurance) to the poorest sections. Hence, the economically active among the poor relied on NGOs, societies, trusts and cooperatives for micro-credit. However, there is a very real disconnect in the way micro finance is being grown as a business, which by definition exists to create value and make a profit, and its notfor-profit, NGO roots This report attempts to take a deeper look at the issues and challenges plaguing the industry, the popular grievances against the concept of Micro-finance as a business and the steps that need to be taken to transform it into a more sustainable business model in the near future. The report analyses recent innovations in microfinance in relation to governance, social performance management, and technological improvements. We have critically examined the importance of regulation in the microfinance industry as a means to improve transparency and accountability of microfinance institutions. Finally, it presents a case study of a donor-based Microfinance organization called ‘RangDe’ and assesses the viability of this model in the light of current challenges facing the industry.