The concept of microfinance grew out of the need to alleviate poverty in the countries like Bangladesh and India. The issue was to institute a system that would be a sustainable way of meeting the challenge.
By the seventies of the last century it was abundantly clear that dole in the form of subsidies was not really a solution but an expedient way largely justified by political needs and natural disasters. But the real solution lay in economic empowerment that doles and vanilla subsidies couldn’t provide.
Given the fact that poor by the very circumstances of their station are forced to be enterprising in their life. If that enterprise could be leveraged in a profitable way that also is sustainable, the goal would have been achieved.
The big challenge to assess in this paradigm was of course the issue of fund. Given a hand to mouth existence, where would the poor get the fund from, however little their requirement may be?
If they were to go to the money-lenders their usurious ways would be killing instead of empowering. The financial institutions would require collateral or some guarantee for repayment. The poor didn’t have the network to generate that kind of guarantee. In the absence of any effective ties if someone were to run away with the loan amount the financial institutions will not have any other option but to write that off.
It was in this context the concept of micro finance institutions took root and the concept of first self-help group and then joint-liability group took birth. The concept of repayment onus held severally by a work was thought of as a stand-in for collateral. And it worked.
As we can see, micro finance institutions were created not simply as a vehicle for lending but with a purpose that had a huge socio-economic implication. Because of this microfinance is said to have a double bottom-line -- (a) social commitment to benefitting clients and (b) a financial commitment to operating profitability. This responsibility implies that the task of an MFI doesn’t end at creating loan books. It needs to commit itself to its customers by handholding to make them reap surplus from the business that they have taken loan to start.
The second part flows from the first and they are linked. If the customers don’t make a surplus from their businesses, loan books would soon fill up with NPAs making the MFI concerned an unsustainable operation.
The double bottom-line also implies a responsible delivery of financial services to the poor that involves client protective social performance. The sustainability of the entire chain of MFI operations doesn’t start and end with giving out a loan, making the customer earn surplus and encouraging repayment of the loan. An MFI operation means that the customers through the entire chain operate with awareness and knowledge. MFIs are also tasked with helping them become aware and gather knowledge to survive and sustain their families by permanently taking them out of the grip of poverty.