Tuesday, December 30, 2008

Good Governance and Self-Help Groups

Good Governance is perhaps the single most important factor in eradicating poverty and promoting development[1]

Good governance means favourable policy frameworks, the rule of law, and the responsible management of political power and public resources by the state is a key prerequisite for sustainable development and poverty alleviation. At the Millennium General Assembly of the United Nations in New York in September 2000, the states of the world endorsed the goal of halving extreme poverty by 2015. Poor people and women from all social strata are often excluded from society''''s decision-making processes. Reform efforts that engage at the level of central state agencies in particular seem in the first place to be rather far removed from the actual target groups.


An SHG is a channel through which micro finance is routed to the poor in the belief that it will prove catalytic in helping them to pull out of poverty. There is a huge unmet demand for micro-finance in India. Bridging the demand supply gap requires an environment that attracts large numbers of micro finance providers. These are small groups of 10-20 persons, who come together with the intention of saving and rotating loans amongst the members. Once these groups stabilize, they are accorded formal support from the banking system so as to widen their lending capacities. Micro finance supposedly circumvents the drawbacks of both the formal and informal systems of credit delivery and also fits within the larger Principles of market liberalization since credit-to-the-poor and profits are not antithetical to each other. It is pertinent to note that the year 2005 was declared by the United Nation as the International Year of Micro Credit.

SHGs are established with the motive of empowering the downtrodden, the marginalized and under-privileged section of the society who are left behind in the process of development initiated by various agencies/ departments. The target group primarily consists of the women, the children, the small and marginal farmers, the grass-root level entrepreneurs, the slum dwellers, the dejected and distressed. Their formation being for the socio-economic development of these persons the primary concern is normally to make finance available to them in a commercially viable but not exploitive in nature, so that they could optimally utilise the available resources with them both human and natural. The organizations economically support any endeavour in their parts to lead a dignified life without any fear of financial deficiency or economic harassment. Micro finance activity is the physical manifestation of this philosophy of the organizations.

It has been suggested that SHGs should be organized as federation .A federation is an association of organizations. Organizations form federations to realize economies of scale and gain strength as an interest group while retaining the advantages of remaining autonomous. SHG federations were promoted primarily as an exit strategy, i.e. to allow organizations that had promoted SHGs to withdraw their support to SHGs while also ensuring their sustainability. The primary purpose of federating SHGs is to ensure the sustainability of SHGs. SHG federations help SHGs internalize all operational costs and reduce the cost of promoting new SHGs. Federations also build solidarity among SHG members by helping them see SHGs as part of a larger organization. This helps build member stake in the SHGs. Building ownership is important in SHGs since, typically, they are not self-promoted organizations, and the small size of SHGs makes it difficult for their members to visualize them as sustainable organizations. SHG federations are mostly registered as charitable societies.

Legal Framework

A SHG carrying out the functions of micro-finance can be incorporated in the following ways under the current legal framework:

(1) Non-Banking Finance Company (NBFC)

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and can be engaged inter alia in the business of loans and advances, insurance business, chit business. An SHG carrying out the business of an MFI and which is incorporated as an NBFC is a company which has its principal business as that of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner. An SHG desirous of commencing business of non-banking financial institution in terms of Section 45-IA of the RBI Act, 1934, has to be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934. Such an SHG have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999) which an SHG finds very difficult to mobilize.

(2) Community-Based Development Financial Institutions (CDFI)

Another desirable form is to build a strong demand system in the form of Community-Based Development Financial Institutions (CDFIs), with the help of NGOs and IRDP-Integrated Rural Development Programme, DRI-Differential Rate of Interests, SC/ST-Scheduled Caste/Scheduled Tribe others. A member owned and member managed CDFI is possible when small groupings such as five person joint liability groups or 20 member SHGs federate into a CDFI without losing their character and autonomy. These CDFIs may be unregistered or registered. If registered, they may choose to be societies, trusts, mutually aided co-operative societies (MACS) or even non-banking finance companies (NBFCs). In certain states, there is a possibility to set up MFIs under progressive cooperative legislation, such as the AP Mutually Aided Co-operative Societies Act 1995, in Andhra Pradesh. Similar Acts have come up in Bihar, Jammu and Kashmir and are on the anvil in Orissa, Tamilnadu and Madhya Pradesh.

(3) Cooperative Society

MFIs can be registered as Societies or Trusts, under the Societies Registration Act, 1860 or the Indian Trust Acts, 1882.The activities of these organizations are required to be well defined by a written down legal Memorandum of Association. The governance is followed by ethically valued norms in accordance with laid down Rules and Regulations, which are known by various names. The activities are also backed by written down policies. This operational manual reflects the guidelines followed in its micro-finance activities. The contents of this manual are circulated among the persons who are connected with the micro-Finance program.

Most Indian MFIs are Non Governmental Organizations (NGO), registered under Societies Act and are not treated as part of the mainstream financial sector. Reservations have been expressed about the legality of NGO-MFIs providing financial services, particularly savings and insurance. However, there has been a general acceptance of the social intermediation role of such institutions for the delivery of financial services to the poor. NGOs do not have the appropriate financial structure for carrying out micro-finance activities. Because NGOs are registered as societies or trusts, they do not have any equity capital. Thus, they can never be capital adequate. The recent Microfinance Task Force set up by the RBI Governor has suggested that NGO-MFIs may carry on financial intermediation activities till a business volume (deposits plus loans) of Rs 5 million. Beyond that scale, there is a need to shift the activity to an MFI registered either as a co-operative or as a company. The latter are required to have a minimum capital of Rs 20 million at start-up.

Governance and Good Governance in SHGs

It is the World Bank, which first popularized the concept of good governance into development discourse in recent years. The Concise Oxford Dictionary defines governance as 1) the act or manner of governing 2) the office or function of governing 3) sway, control. The Governance is mainly linked to:

1. Accountability/transparency

2. Self-regulation

3. Organizational sustainability

Conceptually good governance means not only democratization of the state but democratization of socio economic sphere that touches people''''s lives also. Good governance entails not only reform of public services, efficacy and cost effectiveness of public agencies but also ensures participation of poor and the marginalized.

Thus, Good Governance can be defined as a transparent decision-making process in which the leadership of the organization, in an effective and accountable way, directs resources and exercises power on the basis of shared values.

The generic issues of good governance also apply to MFIs, whether for-profit, mutual benefit or non-profit. Activities to promote good governance comprise capacity building work with partner organizations to help develop their capabilities for self-reliant problem solving. SHGs carrying out the functions of an MFI need, first and foremost, those who will establish them, that is, the Micro-Finance Entrepreneurs (MFEs). The governance of an MFI depends partly on its ability to attract, retain and effectively deploy human resources at all levels. There is a shortage of good quality staff at all levels, from village level barefoot accountants to back office systems administrators. The more senior level staff usually has better alternative opportunities in the mainstream. Applied to SHGs good governance should help to establish an institutional framework that would conduce the members to work in unison, individually and collectively so that the objective of empowerment is achieved and commitment is ensured.

Ownership of such organizations can be of member-users (as in cooperatives), of investors (as in companies), or of no one (as the MFIs, which are non-profit NGOs, are legally not owned by anyone.) Accountability is structurally limited in case of all these legal models. The Societies Registration Act and Trust Act provide relative ease of registration, have no minimum capital requirement, prescribe no capital adequacy, nor any prudential norms. Incentives to register as societies exist as they fulfill the legal requirement to access large amounts of low-cost funds.

In MFIs registered for the purposes of mutual benefit like the co-operatives and mutual benefit trusts the assumption is that member control would ensure good governance. Co-operatives are more difficult to register in practice than Societies and Trusts, but are also subject to political interference through the Registrars (with the exception of Andhra Pradesh, which adopted a progressive Act in 1995). If a co-operative grows, it may apply for a banking licence as an urban cooperative bank, which is subject to the regulation by the Reserve Bank of India.

As regards the genesis of ownership two models seem to exist in India. Some MFIs are member-controlled like the SEWA Bank, an urban cooperative bank in Ahmedabad, the Womens Thrifts Cooperatives (WTCs) established by the Cooperative Development Foundation (CDF) in Andhra Pradesh, and the womens Kalanjiams established as Societies by the DHAN Foundation, Madurai. However, there are also some cases of member-owned but outsider-controlled MFIs, where a few members and staff have used savings, and defaults have happened after that.

Ownership issues can be resolved partly by making depositors and borrowers also shareholders, at least in cooperatives and companies, both of which have shareholders. However, none of the legal forms assure that the governance of an MFI would be with the people. As MFIs grow larger, governance is likely to vest with professionals like in the case of the Grameen Bank, Bangladesh. The SEWA Bank is an example which is an urban cooperative bank, and its Board is entirely comprised of poor women members/shareholders. It is managed by banking professionals with guidance from the Board. This is an example of participative decision-making and good governance.

Types of boards

Normally the governing bodies of such organizations are variously named as Board of Trustees, Managing Committee/ Governing Council or Board of Directors. Broadly speaking there can be various categorizations of boards. One can be on the basis of the participation level:

a. The Rubber-Stamp Board that only reacts to and supports management;

b. The Hands-on Board that engages directly in operations taking on some of managements role.

c. The Representational Board made up of highly influential individuals with access to sources of power and funds;

d. And the Multi-Type Board that balances representational members with microfinance expertise, and are generally better equipped to make informed decisions on a timely and efficient basis. This is the recommended board structure for a good MFI wishing to convert and be regulated.

The SAMSOR formula of Responsibility

The Key areas of Board Responsibility in an SHG can be traced through the SAMSOR formula. The mnemonic SAMSOR stands for:


Setting policy and providing strategic direction to the MFI and then working closely with management to ensure congruence between the institutions strategic thinking and its operations.


Ensuring management accountability by hiring competent professionals, establishing clear goals for these executives, closely monitoring their performance, and confronting weaknesses when they arise.


Boards should be clear with the organizations mission statement and should ensure compliance with the institutions bylaws, procedures, and other legal requirements, because the board can be held liable for the institutions activities.


To continually improve by assessing its own performance on a regular basis, maintaining continuity and institutional memory in its ranks, renewing its membership with new well-qualified directors, and evaluating its own processes for decision making.


The Board should keep an oversight of the administration and accounts and should not derive personal benefit from the organization. Policies should be set through process of periodic meetings and resolutions and all the Board members assume their liabilities jointly and severally, for all the acts of the organization. Regular board meetings are the key to good decision-making as it is often at the meeting table that the quality of the organization and its leaders is truly revealed.


Since the Funds, properties and assets of the organization vest in the board, they are expected to make the most efficient use of the resources in order to attain the organizational goals by ensuring that they operate within the framework of the organizations own charter and the statutes governing it.

Broadly, the boards must learn to GOVERN i.e. (macro manage) MORE And MANAGE i.e. (micro manage, day-to-day routine affairs) LESS. Effective governance strikes the appropriate balance in the relationship between a board of directors and management in their combined efforts to move the institution forward. A good micro finance institution boards understands its role and maintains a clear separation with management of the organization, if it cannot effectively assess managements performance, the role of oversight suffers.

Suggestions to bring about good governance in SHGs carrying out Micro-financing:

In order to bring about good governance there should be establishment of transparent governing structures, through which micro lending organizations will have a stronger basis to grow, expand, and reach more micro entrepreneurs. The Board needs to be thoroughly acquainted with and to advance the aims & objects or mission & vision.

An SHG needs an ethical, sensitive, motivated and responsible team, which is built when the board mobilizes resources efficiently and discourages exaggerated or misleading claims. The board members carrying out the functions of an MFI are expected to have reasonable intelligence and competence and should be respected in the community and by all stakeholders. They should have capacity for growth and should be sensitive to change and new issues affecting the community. Board members should have the ability to work in concert with others, treat staff as partner and when needed should be able to stand up to their conviction.

Each SHG should conduct trainings from time to time and the stress should be on 4 key elements of good governance:

a. board members fiduciary responsibility,

b. strategic leadership,

c. financial oversight and risk management, and

d. Management accountability.

Such an initiative would give the governing bodies a clearer understanding of their role. There should be a series of follow up techniques and assistance assignments to support the development of sound governance practices. Good governing structures give clients and investors confidence and increased opportunities for future income flows through deposits and commercial investment and SHGs need this essentially.

In nutshell, directors and board of and SHG carrying out micro-financing should learn and develop core values of good governance. Charismatic founders are needed to establish an SHG but this alone would not help since eventually there is a need for a strong board with professional managers who will flow in the concept of good governance into the organization through systematic, participatory and fairness approach.

By Nimish Raja & Garima Tiwari


Forget yourself for others, and others will never forget you.

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