Edited by James R. Barth, Chen Lin and Clas Wihlborg
Shubhashis Gangopadhyay and S.K. Shanthi 36.1 INTRODUCTION In the 1970s and the 1980s, the developing countries were using public sector institutions as the main providers of financial services to the poor. These institutions lent to small and marginalized farmers at subsidized interest rates (Martin et al., 2002). However, lending to this group of rural poor is generally associated with higher risks and this, together with poor institutional structures, resulted in formal institutions failing to deliver financial services effectively to the rural poor (Basu and Srivastava, 2005). The 1980s and 1990s saw the emergence of formal and semi-formal financial institutions which attempted to reach out to the rural poor through various microfinance models. The success of the Grameen Bank in Bangladesh, in terms of productivity improvement, poverty alleviation and women’s empowerment, encouraged other countries, including India, to use the microfinance route to reach populations that were otherwise completely bypassed by the formal banking sector. The joint liability group (JLG) model employed by Grameen was a concept that caught on in other countries which came up with slight contextual modifications of the original idea to reach out to the poor. The most widespread model used was that of forming rural women into groups, called self-help groups (SHGs), and lending to these groups instead of to individuals. These loans were savings-linked. The groups save and borrow as collective units, thus reducing the risk of default to the lender. Many non-governmental organizations (NGOs) act as facilitators in this model and link the SHGs to...
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