From Microcredit to Livelihood Finance

An exploration of livelihood finance as the best strategy for India's economic growth
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This paper attempts to address the question, Does microcredit promote economic growth? It lists the following assumptions that limit microcredit:

  • Microcredit is the main financial service that the poor need;
  • Credit can automatically translate into successful micro-enterprises;
  • All poor people wish to be self-employed;
  • Those slightly above the poverty-line do not need microcredit, and giving it to them amounts to mis-targeting;
  • All microcredit institutions can become financially self-sustaining.

The paper then outlines the risks of the microcredit by itself is enough strategy. These include:

  • The Self-Help Group (SHG) Bank linkage microcredit program that diverts attention from the larger problem of financial exclusion of the poor;
  • Over-emphasis on microcredit that reduces government budgetary allocation for other efforts at poverty alleviation such as primary health and education programs.

The paper argues that to become a true instrument of poverty alleviation and economic growth, microcredit has to expand into Livelihood Finance, and provide:

  • Financial services;
  • Agricultural and business development services;
  • Institutional development services.

It presents the case of Livelihood Finance for a farmer in rural Madhya Pradesh, India.The paper concludes that economic growth in India calls for a new paradigm of Livelihood Finance, with much larger levels of resource allocation, both from the public as well as the capital markets. It also outlines the steps that India needs to take to make Livelihood Finance a national strategy.

About this Publication

By Mahajan, V.