Microfinance

Research Paper for IDLO

The Impact of Microfinance on Firm Productivity

~Does Gender Matter? Evidence from India~

Advisor: Jami Hubbard,Manager (Microfinance and Legal Counsel) IDLO,Rome (Italy)

Author: Asami Takeda


FASID/GRIPS Joint Graduate Program on International Development Studies
National Graduate Institute of Policy Studies
7-22-1 Roppongi, Minato-ku, Tokyo, Japan 106-8677

Abstract

This study aims to identify the determinants of firm productivity using 2005 and 2008 firm level data in India. Performance gaps between enterprises owned by female entrepreneurs and male entrepreneurs are also estimated. The study has found that female entrepreneurs operate their businesses more profitable relative to male counterparts; being female entrepreneurs increase both sales and profit growth rate; there is inverted U-shape pattern between profit growth and the educational level of entrepreneurs; higher share of microfinance may lead to higher profit growth. The important implication is that it is proved that empowering women through microfinance is an effective way to increase firm productivity and eventually, it will lead to poverty alleviation. However, microfinance itself is not enough to achieve sustainable growth of micro enterprises. Comprehensive approach including trainings for entrepreneurs, better labor regulations to protect workers employed at informal sectors and so on is required.

Key words: Microfinance, female entrepreneurs, informal sector, firm productivity, India
1. Introduction
In recent years, governmental and non governmental organizations in developing countries have introduced microfinance programs offering financial services to low income households especially targeting women. In 2007, more than 100 million of the world’s poorest families received microfinance and women made up 80 percent of the clients. The growth in the number of very poor women reached has gone from 10.3 million at the end of 1999 to 88.7 million at the end of 2007 (Microcredit Summit Campaign 2009). This is 7.6 times increase in the number of poorest women. The increase represents additional 78 million poorest women receiving microfinance in the last eight years.
Access to credit has received greater attention in the context of poverty reduction and women’s empowerment objectives. The Millennium Development Goals (MDGs) were adopted by world leaders at the United Nations Millennium Summit in 2000. They set measurable and time bound goals, which range from combating poverty, promoting gender equity and empowering women. With the aim to meet MDGs, there has been an increasing expectation on the impact of microfinance programs on women empowerment.
Then, I would like to raise a question, “Why most microfinance borrowers are women?” This is because formal sector commercial banks tend to favor men, mainly because men run the larger business that commercial banks favor. In addition, men tend to control the assets that bank seeks as collateral. Thus, traditionally women have been disadvantaged in access to credit and other financial services despite the fact that nearly 70% of the world’s poor are women.
Therefore, increase in the number of poorest women receiving microfinance leads to good effect on poverty reduction. It may deliver stronger development impacts. Blumberg (1989) finds that women tend to be more concerned about children’s health and education than their husbands. Children’s welfare improves as women’s earning power increases. It suggests that lending to women yields greater social and economic impacts.
Microfinance enables women not only to increase the bargaining power within households, but also enables them to undertake income generating activities. It is estimated that women-owned businesses account for over one-third of all firms, and they are the majority of businesses in the informal sectors in developing countries. They play a major role in creating jobs and generating income for low-income people. This means that expanding microfinance services for women may be the key to alleviate poverty and attain sustainable economic growth in developing countries.
Then, I would like to raise one more basic and direct question; are microfinance really helpful for women who are supposed to be the poorest of the poor? Increasing women’s access to microfinance really enables them to undertake income generating activities? Are there any differences in the impact of microfinance on firm productivity based on the gender of the entrepreneurs? Targeting women is efficient or not?
So far, there is very little data and quantitative research that rigorously examine the impact of microfinance especially by gender. However, fortunately, I could obtain the data from New Life, a NGO based in India. Using the data, the objective of this study is to identify the determinants of firm productivity and verify whether microfinance is really helpful especially for female entrepreneurs in India.
This paper is organized as follows. Section 2 presents Indian economy and microfinance perspective in India. Section 3 describes brief overview of the New Life, a NGO based in India. In addition, the data description and methodology to analyze the impact of the microfinance will be explained. In section 4, the results of the data analysis will be presented. Finally, Section 5 concludes this paper and enumerates the policy implications of this study.

2. Microfinance in India
2-1. Indian Economy
India’s GDP was 1,171 (US$ billions) in 2007 and its annual growth rate of GDP per capita was 7.7%. In the past two decades, India has been making outstanding and sustained progress. At the time of independence in 1947, India was a low income country with mass poverty. Now, the number of very poor people in India is diminishing and now it stands on the edge of the threshold to become the ranks of the world’s middle-income countries.
Since its independence, India reduced the number of absolute poverty by more than half, but the issue of poverty is still prevalent concern. It is estimated that 300 million people out of total population, 1 billion are living below the poverty line. If the poverty line is set from 1 dollar a day to 2 dollar, the number of people living below the poverty line will be increased to 500 million, which is surprisingly half of total population of India. Thus, it is quite essential for Indian governments to develop policies to balance between economic growth and poverty reduction.
Inequality between urban and rural areas is one of the important features of poverty in India. Figure 1 represents poverty situation in India from 1977. This inequality is due to uneven division of natural resources. Poor natural resource endowments and poor access to natural resources is one of the most important causes of poverty. It is estimated that nearly two-thirds of poor people in India are living in rural areas such as Bihar, Orissa, Uttar Pradesh, Madhya Pradesh, and Maharashtra states. It is also said that India’s richest states have incomes that are five times higher than those of the poorest states.
The reason that poverty concentrates on rural area is that rural Indians primarily depend on agriculture income, which is highly dependent on natural condition such as precipitation amount. Inadequate rain and improper irrigation facilities can obviously cause low and sometimes no production of crops. To cope with this, it is better to diversify the risks. It will be essential for India to facilitate non-farm entrepreneurship to get the rural economy moving. Encouraging policies that promote competition in agricultural marketing will also ensure that farmers receive better prices.
On the contrary, poverty prevails in urban area also. Increase in the populations is the main reason for urban poverty. This is due to migration of the rural families from villages to cities. This migration is mainly caused by poor employment opportunities in villages. This situation is exacerbated the fact that there are few job opportunities in urban areas, too.
To combat this situation, creating jobs with good wages in both urban and rural areas is essential. In this context, small enterprises are critical for the economy and social development of emerging markets. They play an important role in creating jobs and generating incomes for low-income people. For example, in Africa, small enterprise and informal sector provide more than 80 percent of jobs today. Also in India, most manufacturing jobs are in the informal sector and they employ 40 percent of the country’s worker. This is disproportionately large compared to other countries in Asia; for example, in Korea it’s only 4 percent. To expand job opportunities in India, the governments should design better labor regulations to attract more labor intensive investment. It also critical to develop strategies to foster informal sector jobs characterized by low productivity and wage into formal sector so that workers can earn higher wage and to be protected by labor laws. In addition, access to financial services for small enterprises remains severely constrained, promotion of efficient, sufficient and widely accessible financial services for them is a key to achieve pro-poor and poverty reduction goals.

2-2. Overview of Microfinance in India
India is one of the largest emerging markets in microfinance in the world. For more than two decades, microfinance initiatives have supported low income Indian households with access to financial services.
Its history started in the early 1980s, with forming informal Self Help Groups (SHGs). Based on the concept of “self-help”, women have formed small groups of ten to twenty and operate a savings-fast business model. The member’s savings are used to fund loans.
Since then, the microfinance sector has grown significantly in the past decades. In the early 1990s, the SHG model was initiated by the National Bank for Agriculture and Rural Development (NABARD) through the SHG-Bank Linkage Program, which links informal women’s groups to formal banks. This concept held great appeal for non-government organizations (NGOs) working with the poor, prompting many of them to collaborate NABARD in the program. Today the SHG model has the largest outreach to microfinance clients in the world.
On the contrary, Micro Finance Institutions (MFIs), largely of non-profit origins, emerged in the late 1990s and their growth is remarkable. Figure2 shows growth trend of MFIs in India from 2003. Today there are over 1,000 Indian MFIs and the number of borrowers has reached nearly 4.5 million. MFIs have emerged as strategic partners to individuals and entities interested in reaching out to India’s low income clients.


3. New Life
3-1. Overview of the organization
“New Life”, one of the promising NGOs in India, established in 1993 with the help of philanthropists from various fields such as agriculture, engineering, medical and so on. Their mission is to bring to mainstream the women and their children belonging to weaker sections who are far behind their counterparts in socio-economic status. Under this mission, New Life is undertaking wide range of projects such as crèche program for the children of women prisoners, rehabilitation of prisoners, child labor schools, livelihood improvement program for women, health program, skill training for the women members and the members in prison, adult literacy program, and micro insurance and so on.
One of their core projects is empowering poor women through microfinance. New Life started this service from 1995. As of today, the number of the clients has reached 23,680 since the service has been started. Women constitute 97.5% of the entire members and the repayment rates are surprisingly 100%. This can be achieved thorough education thorough credit discipline, regular follow-up by the staffs, selection method of borrowers and finally, peer pressure among the group members. New Life requires members to form groups. As the earlier member in the group repay, the other member gets the loan. Thus, peer pressure is built in the system. In addition, to lower the cost of borrowing, New Life provides marketing linkage thorough online microfinance platform called “rang de” where the social investors are encouraged to help the women to improve the quality of produce they make, registration of their units, licensing formalities, and marketing tie-ups suggested by investors.

3-2. Description of Study Site and Data
The data used in this research were provided by the New Life. The first survey was conducted in 2005 and the second one was in 2008. 30 female entrepreneurs and 20 male entrepreneurs were selected through sampling from all the geographic area where New Life works, which is Trichirappalli District. As Figure 3 shows, Trichirappalli District is located along the Kaveri River in Tamil Nadu State, one of the largest states in India. The survey area covers 11 rural villages in this district. Almost all the selected male entrepreneurs live in Srirangam village except one. This is simply because the data of male entrepreneurs were provided by a branch office near Srirangam.
In Tami Nadu State, there were about 62.41 million people, which are corresponding to 6% of total population in India according to 2001 national census. About 56% of the population lives in rural area and the city’s population is predominantly Hindu and there are sizable Christian and Muslim populations.
Tami Nadu has achieved significant development success over the last 15 years. It is one of the India’s most industrialized states with economic growth rates which are above the national average. The state’s performance in social issues such as literacy rate (male literacy rate is 94.17% and female literacy rate is 88.73%, those are higher than that of average rate, 66%), life expectancy, gender equality, female mortality rate, and access to safe drinking water, are impressive.
Despite these achievements, the states have over 12 million people still living below the poverty line, the majority in rural areas. In rural village economy such as the survey area, agriculture is major income source of people. On average, people get employment in agriculture sector for 250 days a year. Rural poverty is concentrated among landless agriculture workers and small farmers, who constitute 46% of the rural workforce. They are suffering from vulnerability of income variation since agriculture depends on natural conditions such as precipitation amount. It is also said that women headed households in rural areas are worst affected by poverty.
The government of Tami Nadu focused on reducing poverty among women, children and vulnerable people through empowerment and employment. The state spends 30% of its budget on social welfare and rural development programs. One such successful program is Mahalir Thuttam (A program for women) implemented in 1992. Its aim is to empower the poor women thorough forming community thorough Self Help Groups and by providing access to credit and other linkages. As a result of this program, a saving of Rs.8100 million has been mobilized by the members and credit linkage of Rs.14290 has been provided. In addition to the mobilization of the money, this program has been successful in empowering women socially, making them aware of the government scheme and so on. However, the success achieved in social empowerment has not translated in economic empowerment. One of the reasons is that the program emphasized on credit activities too much. To provide credit is important to reduce poverty, however, how to achieve sustainable livelihood improvement should be considered at the same time. For example, fostering micro enterprises to generate income activities should have been emphasized more.
　　In such circumstance, the activities of New Life are important. New Life is implementing Livelihood Improvement Program from 1994 by forming Self Help Groups among the poor women and they are trained to take up small enterprises aiming at generating incomes for their families. The women members are engaged in artisan works, handicrafts, service sector, small business, vending, and self employment initiatives and their activities are monitored periodically by the Livelihood Improvement Committee of the organization. The activities of New Life have social significance and it is hoped that New Life take active role in empowering women more than ever.

3-3. Characteristics of Sample Enterprises
Table 1 summarizes the characteristics of sample enterprises based on gender of the entrepreneurs; the mean values of firm productivity, years of schooling of entrepreneurs, and the number of employees and so on. They are all unregistered micro and small enterprises with less than 10 workers except two; female entrepreneurs who engaged in brick works and banana production have 20 and 12 workers respectively. They all started their business using New Life’s microfinance service except one male entrepreneur. All of their businesses are categorized as service sectors such as flower sales, photo studio, grocery shops, tailor shop, laundry shop, brick work, and hotel and so on except one. Only one female entrepreneur started banana production business, categorized as agriculture sector. Then, why most of the clients using microfinance have started service businesses not agriculture or manufacturing services? There are mainly two reasons. One is that they were already agriculture workers and they rank them as side businesses. Second reason is that service sectors require less initial investment compared to manufacturing sector in general, so it is easier to start their businesses.
　　According to NationMaster, the average years of schooling of adults in India are 5.5 years. Educational level of New Life clients is higher than this; female entrepreneurs 7.9 years and male entrepreneurs 9.9 years. On average, male entrepreneurs received higher education by two years compared to that of female. Another interesting feature is that age of female entrepreneurs is higher and they operate their businesses longer compared with that of male entrepreneurs on average.
　　Regarding the annual loan size, female entrepreneurs borrowed Rs 27,023 in 2008 and this amount was larger than that of male counterparts as well as the amount of microfinance. This is because female entrepreneurs rely on microfinance as business loan but they diversify their credit sources and they also used banking services. On the contrary, male entrepreneurs rely on microfinance as major source of their business loan and they did not use banking services except one entrepreneur. This is due to lack of credit discipline; most male entrepreneurs had bad debts in their early loans with banks. In addition, the bank loans are not easily accessible like microfinance because of the following reasons. First, bank loans are mostly available only for a team loan and when the loan is outstanding, a successive loan is usually not allowed. Second, the loan limit fixed by banks is mostly underfinanced. Third, the stipulation such as margin (contribution from borrowers) and collateral security requirement is difficult to comply with. Finally, banking working hours is not suitable for agricultural wage earners since they will lose their daily wage income. In addition, bureaucratic approach and unfriendly attitude of officials of banking sector also keep people away.
Next, regarding the firm productivity, both female and male entrepreneurs achieved significant growth rates in sales and profit from 2005 to 2008. Especially, female-owned business showed remarkable growth in profit, which is more than six times higher than that of 2005 although they hold less amount of the asset compared to that of male entrepreneurs.
In the next section, I would like to assess the determinants of the firm productivity; sales and profit growth from 2005 to 2008 using the ordinary least squares (OLS) regression model.
3-4. Methodology
In introduction part, I raised several questions; does microfinance really helpful for women? Are there any differences in the impact of microfinance on firm productivity based on the gender of the entrepreneurs? To answer these questions, the determinants of the firm productivity have to be analyzed quantitatively. To do this, the OLS regression model is employed. I set two dependent variables; sales and profit growth. The econometric model is expressed as follows respectively;
where the dependent variable, SalesGrowthi is the sales growth rate from 2005 to 2008. The independent variables are defined as follows:
DummySex =1 if gender of the entrepreneurs is female, =0 if otherwise,
Age = the age of the entrepreneurs,
Agesq = the square value of the age of the entrepreneurs,
Edu = the years of schooling of the entrepreneurs,
Edusq = the square value of the years of schooling of the entrepreneurs,
Firmage = the age of the firms,
Asset08 = the value of the firm’s asset in 2008 (Rs),
MFshare = the share of microfinance out of total loan,
Dummylocal1 = 1 if the firm(s) located in Srirangam village, =0 if otherwise,
Dummylocal2 = 1 if the firm(s) located in Tolgate village, =0 if otherwise,
Dummylocal3 = 1 if the firm(s) located in Aiamangalam village, =0 if otherwise,
Dummylocal4 = 1 if the firm(s) located in Kajepettai village, =0 if otherwise,
Dummylocal5 = 1 if the firm(s) located in Thandankorai village, =0 if otherwise,
Dummylocal6 = 1 if the firm(s) located in Manjakorai village, =0 if otherwise,
Dummylocal7 = 1 if the firm(s) located in Amoor village, =0 if otherwise,
Dummylocal8 = 1 if the firm(s) located in Gunaseelam village, =0 if otherwise,
Dummylocal9 = 1 if the firm(s) located in Sathyamoorthinagar village, =0 if otherwise,
Dummylocal10 = 1 if the firm(s) located in Kallur village, =0 if otherwise,
Dummylocal11 = 1 if the firm(s) located in Keelavalady village, =0 if otherwise,
ei = the error term, which is normally distributed with zero mean, and αs = regression coefficients. The determinants include the characteristics of entrepreneurs (sex, age and education), the enterprise characteristics (production experience in terms of firm age since establishment, total asset value in 2008), locational dummies and the share of microfinance out of the entire credit sources.
In the second stage, I would like to identify the determinants of the profit growth. The economic model is expressed as follows;
where the dependent variable, ProfitGrowthi is the profit growth rate from 2005 to 2008. The independent variables are defined as same as the first stage. βs equal to regression coefficients.

4. Results of econometric analysis
Table 2 presents the result of estimating the determinants of sales growth from 2005 to 2008. The results suggest that gender of the entrepreneurs is statistically significant at 5 percent level. The positive coefficient of the dummy variable of entrepreneurs’ gender means holding other factors constant, being female entrepreneurs increase the sales growth rate by 7.7 percent. This suggests that enterprises owned by female entrepreneurs grew faster than those owned by male entrepreneurs. In addition, the coefficient of local dummy, Kajepettai village is negative and significant. This should be investigated more.
As for the profit growth (Table 3), again, the gender of entrepreneurs is statistically significant and positive at 1 percent level. This means that being female entrepreneurs increase the profit growth by 22 percent holding other factors constant. This may be attributing to New Life’s activity of training women on entrepreneurship. In addition, a statistically significant positive coefficient of the entrepreneurs’ years of schooling and a statistically significant negative coefficient of the education squared indicate an inverted U-shape pattern between profit growth and the educational level of entrepreneurs. Moreover, the sign of the coefficient of independent variable, the share of microfinance is positive as expected. Even though it is not statistically significant, it may suggest that the higher the share of microfinance out of the entire credit resources, the higher the profit growth of the enterprise. None of the local dummies are significant, indicating there are no specific regional effects.

5. Conclusion
The objective of this study is to identify the determinants of firm productivity in India and verify whether microfinance is really helpful for female entrepreneurs or not. The major findings are as follows. First, the data shows that the enterprises owned by female entrepreneurs achieved significant increase in both sales and profit growth relative to male entrepreneurs. In particular, the average profit growth rate of female entrepreneurs is remarkable. Also, the data shows that annual loan size of female entrepreneurs is larger relative to male entrepreneurs. Female entrepreneurs rely on microfinance as their major credit resources; however, they also used banking services. On the contrary, male entrepreneurs rely much more on microfinance and they did not use banking services. This reveals that most male entrepreneurs had bad debts in their early loans with banks. As next stage, the OLS regression results show that the gender matters to both sales and profit growth; being female entrepreneurs increase both sales and profit growth rates. In addition, the inverted U-shape pattern between profit growth and the educational level of entrepreneurs is proved. Finally, it is not statistically significant, but higher share of microfinance out of the entire credit sources may lead to higher profit growth of the enterprises.
To sum up, targeting women is efficient since female entrepreneurs can operate their business more profitable than male entrepreneurs. In addition, since entrepreneurs who use more microfinance may lead to higher profit growth, it is verified that empowering women through microfinance is an effective way to increase firm productivity and eventually, it will lead to poverty alleviation.
However, microfinance itself is not enough to achieve sustainable growth of their business. At the same time, training programs on technology and management for entrepreneurs should be provided to stimulate their innovations. New Life already implemented Livelihood Improvement Program to train poor women to take up small enterprises aiming at generating incomes for their families, their active role in this field are very much hoped more than ever. Furthermore, the role of the government is also critical. To create more jobs and help micro enterprises to achieve their sustainable growth, the government has to play a role as a facilitator so that workers employed at informal sectors are able to get requisite level of social protection and security to have decent working environment enabling them to express their skills fully and enhancing their competitiveness of their outputs and thereby raising their income and social status. Finally, to assess whether microfinance is working well in the region or not, more empirical research on microfinance effect using the data should be encouraged. Ideally, to major the impact of microfinance more rigorously, the comparison of same characteristics of enterprises with microfinance and without microfinance is needed.
REFERENCES
Asami Takeda. “The Impact of ROSCA Participation on Household Schooling Expenditure : The Case of Kenya.” FASID/GRIPS Joint Graduate Program on International Development Studies, Applied Development Research, 2008.
Asenso-Okyere, W.K. “Policies and Strategies for poverty alleviation in Ghana” Institutes of Statistical , Social and Economic Research, University of Ghana, Accra, Technical Publication No.57, 1993.
Blumberg, Rae. “Entreprenuership, credit, and gender in the informal sector of the Dominican Republic.” In Women in Development: A.I.D.’s Experience, 1973-1985, vol.2, 1989. .
Cheston, Susy and Kuhn, Lisa. “Empowering Women through Microfinance.” UNIFEM, 2002.
Dale W Adams and Delbert A.Fitchett. “Informal finance in low-income countries.” Westview press, 1991.
Hayami, Yujiro and Yoshihisa Godo. “Development Economics: From the Poverty to the Wealth of Nations.” Oxford; New York: Oxford University Press, pp.245-246, 2005.
Hulme, David. “Impact assessment methodology for micro finance.” World Development, 1995.
John E. Akoten, Yasuyuki Sawada and Keijiro Otsuka. “The Determinants of Credit Access and Its Impacts on Micro and Small Enterprises: The Case of Garment Producers in Kenya.” The University of Chicago, 2006.
Kimuyu, Peter. “Micro-level institutions & enterprise productivity: insights from Kenya’s small business sector.” World Development, 2001.
Linda Mayoux. “Women’s Empowerment through Sustainable Microfinance: Rethinking Best Practice.” 2005.
Morduch, Jonathan and Armendariz, Beatriz. “The Economics of Microfinance.” Boston: Massachusetts Institute of Technology, 2005.
N.Kavitha and A.Ramachandran. “Overview of Microfinance for Women in India.”
Rahmat Megananda Achmad Maulana. “The Impact of Microfinance to Micro and Small Enterprise’s Performance and the Improvement of Their Business Opportunity.” Padjadjaran University, 2006.
Ranjula Bali Swain. “Does Microfinance Empower Women? Evidence from Self Help Groups in India.” Uppsala University Working Paper No.2007:24, 2007.
Shwetlena Sabarwal and Katherine Terrell. “Does Gender Matter for Firm Performance?” The World Bank Policy Research Working Paper No.4705, 2008.
Stevenson, Lois and St-Onge, Annette. “Support for Growth-oriented Women Entrepreneurs in Kenya.” ILO, 2005.
Susy Cheston. “Just the Facts Ma’am: Gender Stories from Unexpected Sources with Morals and Microfinance.” Opportunity International, 2006.
Microcredit Summit Campaign Report 2009
CELENT. http://www.celent.com/124_466.htm (retrieved in 4/2009).
EconomyWatch. http://www.economywatch.com/indianeconomy/indian-economy-overview.html (retrieved in 4/2009).
Nation Master.com. http://www.nationmaster.com/country/in-india/edu-education. (retrieved in 4/2009).