School of Geography - Theses

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    Sustainable microfinance and poverty alleviation : understandings of small farmers in rural Nepal
    Acharya, Yogendra Prasad ( 2006)
    Microfinance, as a tool for rural development, is one of the most important sectors of financial services for the rural poor in the developing countries. However, a high credit default rate is a worldwide problem that is particularly pronounced in the developing countries. Credit providers in developing countries have generally experienced serious financial problems since the late 1970s due to a constant high credit default rate and consequent loss on loans. Microfinance for the poor is one of the major grassroots initiatives in rural development in Nepal. However, the high credit default rate amongst small farmers has seriously questioned the small farmers' sense of ownership and commitment towards the sustainability of microfinance institutions at the local level. Institutional sustainability of a microfinance institution is heavily dependent on the repayment rate of loans, but the actual repayment of loans largely depends on how the small farmers understand and engage with institutional credit. Very little research has been conducted into the views of the supposed beneficiaries of microfinance schemes, that is, the small farmers. This thesis, based on extensive field research amongst the small farmers of the Chitwan district of Nepal, examines and documents their understandings of credit, what sustainable microfinance means to them, why there is a high rate of loan defaults (on average more than 60%), and other related issues. My research revealed that the small farmer-managed microfinance institutions were not able to achieve the required repayment rate level due to the imposition of a local bureaucratic framework dominated by internal social differences and with totally different expectations between lenders and borrowers. The results indicate that the understandings of the terms `credit' and `sustainability' differ substantially between the loaning institutions and small farmers. This thesis argues that the divergence in views, interests, and perspectives between bankers and policymakers on the one hand, and the small farmers on the other, explains why microfinance programs will continue to struggle to fulfil their mission of poverty alleviation and sustainability. The study reveals that low incomes amongst small farmers and their understandings about credit are the key factors responsible for high credit default. In conclusion, the findings in this study demonstrate that unless governments and lending institutions understand how small farmers interpret the terms `credit' and `sustainability' there will be no mutually favourable outcomes. Providing small farmers `credit' without other inputs such as training and education, infrastructure and support services, marketing facilities and an appropriate pricing policy simply burdens them with increasing debt. The findings from this study will help the government and lending institutions in understanding better the views held by small farmers, and will hence ensure more effective delivery of credit to the poor and others in need of financial services in rural Nepal.