A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
CHAPTER-TWO: LITERATURE REVIEW
Microfinance, according to Otero (1999, p.8) is “the provision of financial
services to low-income poor and very poor self-employed people”. These
financial services according to Ledgerwood (1999) generally include savings
and credit but can also include other financial services such as insurance and
payment services. Schreiner and Colombet (2001, p.339) define microfinance
as “the attempt to improve access to small deposits and small loans for poor
households neglected by banks.” Therefore, microfinance involves the
provision of financial services such as savings, loans and insurance to poor
people living in both urban and rural settings who are unable to obtain such
services from the formal financial sector.
In the literature, the terms microcredit and microfinance are often used
interchangeably, but it is important to highlight the difference between them
because both terms are often confused. Sinha (1998, p.2) states “microcredit
refers to small loans, whereas microfinance is appropriate where NGOs and
MFIs1 supplement the loans with other financial services (savings, insurance,
etc)”. Therefore microcredit is a component of microfinance in that it involves
providing credit to the poor, but microfinance also involves additional non-
credit financial services such as savings, insurance, pensions and payment
services (Okiocredit, 2005).
Microcredit and microfinance are relatively new terms in the field of
development, first coming to prominence in the 1970s, according to Robinson
(2001) and Otero (1999). Prior to then, from the 1950s through to the 1970s,
the provision of financial services by donors or governments was mainly in the
form of subsidised rural credit programmes. These often resulted in high loan
defaults, high lose and an inability to reach poor rural households (Robinson,
2001).
Robinson states that the 1980s represented a turning point in the history of
microfinance in that MFIs such as Grameen Bank and BRI2 began to show
that they could provide small loans and savings services profitably on a large
scale. They received no continuing subsidies, were commercially funded and
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
fully sustainable, and could attain wide outreach to clients (Robinson, 2001). It
was also at this time that the term “microcredit” came to prominence in
development (MIX3, 2005). The difference between microcredit and the
subsidised rural credit programmes of the 1950s and 1960s was that
microcredit insisted on repayment, on charging interest rates that covered the
cost of credit delivery and by focusing on clients who were dependent on the
informal sector for credit (ibid.). It was now clear for the first time that
microcredit could provide large-scale outreach profitably.
MIX defines an MFI as “an organisation that offers financial services to the
very poor.” (MIX, 2005). According to the UNCDF (2004) there are
approximately 10,000 MFIs in the world but they only reach four percent of
potential clients, about 30 million people. On the other hand, according to the
Microcredit Summit Campaign Report (Microcredit Summit, 2004) as of
December 31st 2003, the 2,931 microcredit institutions that they have data
on, have reported reaching “80,868,343 clients, 54,785,433 of whom were the
poorest when they took their first loan”. Even though they refer to microcredit
institutions, they explain that they include “programs that provide credit for
self-employment and other financial and business services to very poor
persons” (Microcredit Summit, 2004).
Rotating Savings and Credit Associations are formed when a group of people
come together to make regular cyclical contributions to a common fund, which
is then given as a lump sum to one member of the group in each cycle
(Grameen Bank, 2000a). According to Harper (2002), this model is a very
common form of savings and credit. He states that the members of the group
are usually neighbours and friends, and the group provides an opportunity for
social interaction and are very popular with women. They are also called
merry-gorounds or Self-Help Groups (Fisher and Sriram, 2002).
Microfinance has captured the imaginations of many people working to reduce
poverty.
The premise is simple. Rather than giving handouts to poor households,
microfinance programs offer small loans to foster small-scale entrepreneurial
activities. Such credit would otherwise not be available -- or would be only
available at the very high interest rates charged by moneylenders (who often
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
charge as much as 10% per month). Moneylenders operate with little
competition since potential entrants quickly find that costs and risks are high --
and borrowers are usually unable to offer standard forms of collateral, if any at
all. (Rashid and Townsend, 1993)
Many development practitioners and financial institutions believe that there is
a paradigm shift from microfinance to inclusive finance – from supporting
discrete microfinance institutions (MFIs) and initiatives to building inclusive
financial sectors. Inclusive finance recognizes that a continuum of financial
services providers work within their comparative advantages to serve poor
and low-income people and micro and small enterprises. Building inclusive
financial sectors includes but is not limited to strengthening micorfinance and
MFIs. Microfinance has been defined as the provision of diverse financial
services to poor and low-income people. Retail financial service providers that
serve this market segment are increasingly more difficult to define with one
common term. They include NGOs, private commercial banks, state-owned
banks, non-bank financial institutions (such as finance companies and
insurance companies) credit unions and credit and savings cooperatives.
While each of them plays an important role in inclusive finance, many of them
could not be considered MFIs in the technical sense. (However, for the
purpose of this paper, we mean and measure financial inclusion only in the
sense of banking inclusion as banks are the mainstay of financial systems of
the developing countries like Bangladesh).- Dr. Toufic A. Choudhury, Faculty
member of BIBM
The Least Developed Countries (LDCs) in the east have started refocusing
their attention on SMEs to enhance their role in bringing about structural
changes in their economies. For Bangladesh SMEs have assumed special
significance for poverty reduction programmes and potential contribution to
the overall industrial and economic growth.
To achieve the desired 8-10 per cent GDP growth, the manufacturing sector
has to be made highly vibrant, increasing both its growth rate and its
contribution to the GDP by leaps and bounds. The most cost-effective route
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
for this would be through development of SMEs. Abdul Awal Mintoo, CACCI
Journal, Vol. 1, 2006
Micro-credit programs that are poverty focused and that provide financial and
business services to very poor persons for generation of self-employment and
income. Credit is a powerful instrument to fight poverty. The role of micro-
credit in reducing poverty is now well recognized all over the world. It is no
longer the subject matter of micro-credit practitioners alone. Governments,
donors, development agencies, banks, universities, consultants,
philanthropists and others have increasing interest in it H. I. Latifee, Grameen
Trust.
The robustness of SME contributions to employment generation is a common
phenomenon in most developing countries in that the magnitude varies
between 70 to 95 per cent in Africa and 40 to 70 per cent in the countries of
the Asia-Pacific region (Ahmed, M.U. 1999).
In order to determine policy priorities for sub-sector development within the
SME sector an exercise was carried out under the JOBS study (JOBS 1998)
for identifying dominant sub-sectors. On the basis of employment criterion, the
following sub-sectors at four-digit levels turned out to be dominant in
descending order: Bakery, Specialized handlooms, Dyeing and printing,
Footwear, Plastic Products, Steel Furniture, Electrical goods, and Engineering
workshops. (Ahmed, M.U. 1999).
Small and Medium-sized Enterprises (SMEs) play a pivotal role in terms of
economic growth, employment generation, and industrialization (e.g. through
entrepreneurship development). Although the role of SMEs varies at different
stages of economic development, their role is particularly important in
developing countries and LDCs. Beck, Kunt, and Levine (2005) have found a
strong correlation between SME development and GDP per capita, but the
relationship between growth and the overall business environment for SMEs
overshadows the former relationship.
SMEs need low capital investment per unit of output and give rise to greater
opportunities for direct or indirect employment. In a positive environment,
SMEs offer sustainable business solutions that simultaneously fight poverty
and accelerate economic growth (Agbeibor, 2006). In developing countries,
SMEs traditionally play an important role with respect to poverty alleviation,
while at the same time contributing significantly to economic growth as the
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
development initiatives targeted at them create jobs and increase productivity
(Agbeibor, 2006).2 For developing countries or LDCs, the problem of rural
unemployment, which results in an unhealthy rural-urban migration, can be
solved through SME development in rural areas.3 Rural SMEs generate
significantly more jobs than urban SMEs. This indicates a different
relationship between SME growth and employment generation in different
geographical environments (North and Smallbone, 1996).
SMEs are also considered as the backbone of the European economy and
are the best potential source of job creation and economic growth
(Verheugen, 2006). In Japan, some 70 per cent of Japanese workers are
employed by SMEs and half the total value added in Japan is generated by
SMEs (Lichiro, 2006). Carl Liedholm, Michael McPherson and Anyinna Chuta
(1994) showed that the percentage of job growth coming from enterprise
expansion in rural areas is significantly higher than that of urban areas in
Africa.
Small and Medium-sized Enterprises are the seeds for a vital entrepreneurial
economy. In many economies, SMEs nurture large-scale industrialization
through entrepreneurship development. One of the hypotheses on the role of
SMEs in the course of economic development is their vertical and horizontal
expansion over time in large-scale industrialization by fostering
entrepreneurship (Juneja, 2000). Global experiences show that an efficient
SME sector is conducive to fast industrial growth (Hill, 2001). Llyod (2002)
analyzed the South African SME sector over the 1980 to 2000 period and
found that expanded small businesses were playing an increasingly important
role in the manufacturing, construction and trade sectors in South Africa, but
their role was declining in the agriculture, transport and storage sectors.
However, the poor performance of SMEs in terms of growth, product diversity,
and expansion of markets, indicates that SMEs could not reach the expected
level. More importantly, unlike in many economies, SMEs in the current
environment lack the capacity to nurture the process of large-scale
industrialization through vertical and horizontal expansion by fostering
entrepreneurship (Hal Hill, 2001). It is extremely important to analyze the
possible reasons for this lack of entrepreneurship development through SMEs
and investigate successful entrepreneurs and the possible causes of their
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
success in order to provide policy suggestions for the development of the
sector.
Although SMEs play a vital role in any economy, they are very vulnerable to
the effects of globalization in the absence of some economic criteria. For
example, under the avalanche of low priced Chinese product’s imported in
Japanese, Korean and Taiwanese markets, the SMEs of these countries
adopted different strategies: some firms relocated plants to the Chinese
mainland, some exited the market, others protected their market by switching
to more capital intensive technology so as to produce more differentiated
high-tech products (Croix, 2006). These countries have the capacity to
overcome their vulnerabilities by adopting different strategies while developing
and least developed countries often lack the capabilities to facilitate such
transformations.
The degree of vulnerability is very high in most developing countries and
LDCs in the absence of sound business environments and the existence of
weak business strategies.
Moreover, SMEs in developing countries are vulnerable to international trade
due to their comparatively low productivity and lack of competitiveness
(Deshaies and Julien, 1994).
The countries that are better prepared in terms of solid business
environments and strategies can reap the benefits of globalization by scaling
up their SMEs to large-scale industries.
One of the positive implications of globalization on SME expansion in
developing countries and LDCs is the possibility of FDI inflows and soaring
export opportunities: there is a powerful relationship between
internationalization and SMEs. In investigating the linkage between
internationalization and SME growth, Lu and Beamish (2002) examined the
impact of exporting products and FDI on SME growth. They came to the
conclusion that FDI is more effective for SME growth. In India, a very big
economy with a large number of consumers, trade liberalization and
investment liberalization gave an impetus to the development of SMEs, which
in turn led the Indian economy towards large-scale industrialization. Juneja
(2000) further demonstrates that small industry growth rates have increased
rapidly compared to the growth rate of the total industrial sector of India since
1991. Juneja also shows how Maruti–Suzuki’s capacity building in India’s
A Study into the “Non-Formal & Voluntary Banking Services” of SIBL
automobile industry attracted FDI from Japan, South Korea, Germany, UK,
and USA.
In recent years the business strategy field has experienced the renaissance of
corporate social responsibility (CSR) as a major topic of interest. The concept
has not surfaced for the first time. CSR had already known considerable
interest in the 1960s and 70s, spawning a broad range of scholarly
contributions (Cheit, 1964; Heald, 1970; Ackermann & Bauer, 1976; Carroll,
1979), and a veritable industry of social auditors and consultants. However,
the topic all but vanished from most managers' minds in the 1980s (Dierkes &
Antal, 1986; Vogel, 1986). Having blossomed in the 1970s CSR all but
vanished and only re-emerged in recent years.
CSR resurfaced forcefully over the past ten years in response to mounting
public concern about globalization. Firms find themselves held responsible for
human rights abuses by their suppliers in developing countries; interest
groups demand corporate governance to be transparent and accountable;
rioters from Seattle to Genoa protest violently against the cost of free trade
and other perceived negative consequences of globalization. However, nearly
two decades of neglect have helped to undo much of the past achievements
of corporate social responsibility. It is thus no surprise that both practitioners
and scholars are struggling once again to answer the question what the
strategic implications of CSR are.
The literature on CSR and innovation draws on a number of different
theoretical traditions, which often are in contradiction to each other. Wood
(1991) describes three levels of analysis: institutional, individual, and
organizational. We add to this analysis a fourth level which we will
characterize as global.
Davis (1973) describes the iron law of responsibility, as the fact that firms
exercising power will eventually be held accountable by society. At this level
CSR can be best understood as a quest for organizational legitimacy. Firms
are under the obligation not to abuse the power invested on them by society
or they risk losing society’s implicit endorsement. More recently this view point
has resurfaced as a firm’s need to retain its “license to operate” (Post,
Preston, & Sachs, 2002: 21).