Contribution of Micro-finance Institutions to Poverty
Micro-finance Institutions are viewed as a means to end poverty in many developing nations. Microfinance is the provision of a broad range of financial services such as
- deposits
- loans
- payment services
- money transfers
- insurance to poor and low-income households and their microenterprises
The three types of sources for micro-finance are:
- formal institutions – i.e. rural banks and cooperatives
- semiformal institutions – i.e. nongovernment organizations
- informal sources – i.e. money lenders and shopkeepers
Institutional microfinance includes microfinance services provided by both formal and semiformal institutions. Microfinance institutions are institutions whose major business is the provision of microfinance services.
About 90% of the 180 million poor households in the region still lack access to institutional financial services. (ADB) Most formal financial institutions deny the poor financial services because of
- perceived high risks
- high costs involved in small transactions
- the poor’s inability to provide marketable collateral for loans
ADB, through its Microfinance Development Strategy, aims to ensure permanent access to institutional financial services for the region’s poor people and their small businesses. To achieve this objective, ADB will focus on
- creating a microfinance-friendly policy environment
- developing financial infrastructure
- building viable retail institutions
- supporting pro-poor innovations
- supporting social intermediation
Providing the poor with improved facilities to save and to have better access to credit and insurance helps them manage risk, build assets, increase income, and enjoy a better life. (ADB)
The majorities of poor people live in rural areas and have very little opportunity. Microfinance helps these people who have no collateral. The economic environments provide business opportunities. In Nepal for instance, most Nepalese micro entrepreneurs are economically isolated, which means that their market is often local, small and does not offer any demand growth prospects. Commercial banks and other financial institutions normally do not like to go in that area because of the geographical constraints, underdeveloped infrastructures and other physical constraints. (Sapkota) However, these rural areas have a substantial demand for micro-credit.
If rural people are not brought into the mainstream for economic and social change, there will be no change in rural development. (Sapkota)
Asian Development Bank’s Vision is a region free of poverty. They know and acknowledge that expanding access to financial services is critical for eliminating poverty and for realizing the Millennium Development Goals. Recent estimates by the Consultative Group to Assist the Poor (CGAP) indicate that microfinance institutions in Asia have about 41 million loan accounts and 98 million deposit accounts. (ADB)
The microfinance industry has been evolving over the last 3 decades. In the early part of the 1980’s, the industry was dominated by nongovernment organizations (NGOs) that created various programs which attempted to address the failure of markets and governments to provide financial services for the poor which relied heavily on external grant funding. (ADB) ADB’s first microfinance project supported the NGO microfinance institutions in the Philippines. Some of these programs became flagship operations. One such operation is the Grameen Bank in Bangladesh. BRAC’s impressive results generated a lot of interest in microfinance in the broader development community. (ADB)
ADB has supported microfinance for many years. From 1988 to 1999, ADB approved 14 microfinance projects totaling 0.10 million, 13 projects with microfinance components valued at about 6.79 million, and 45 technical assistance projects for about .42 million. Recognizing that the industry landscape has changed over the years, ADB began to formulate a microfinance development strategy in 1999 that was approved in May 2000. (ADB)
After the strategy was adopted, ADB’s assistance shifted from providing support for narrowly defined microcredit projects to building financial systems for the poor. From 2000 to 2004, 10 microfinance loan projects totaling 0.80 million and 16 projects with microfinance components of about 1.02 million were approved. ADB also provided financial assistance to 7 governments to prepare microfinance projects
and for 21 advisory technical assistance projects for capacity building at various levels in 12 countries. (ADB)
Another significant change is that microfinance services are no longer considered a niche market activity that should be confined largely to the development community and carried out solely by specialized microfinance institutions. Today, it is believed that if microfinance is to achieve its full potential, it must be fully integrated into a developing country’s financial system with access to vast amounts of human, physical, and financial resources and management know-how. (ADB)
According to a study by ADB, a paradigm shift toward market-based approaches to poverty reduction is also taking place. In the larger business world, a growing number of established companies including some multinational corporations have achieved impressive results in
reaching the poor in innovative ways with their products and services. This reaffirms the feasibility of large-scale commercial microfinance and strengthens private sector interest. (ADB)
References:
Asian Development Bank. Microfinance: Financial Services for the Poor. 12 November, 2009. Retrieved 22 June, 2011 from http://www.adb.org/microfinance/default.asp
Asian Development Bank. Special Theme: The Changing Face of the Microfinance Industry. Building Financial Systems for the Poor. ADB Report 2004. Retrieved 22 June, 2011 from http://www.adb.org/Documents/Reports/Annual_Report/2004/special-theme.pdf
Sapkota, Shanti. Micro Finance Institutions and It’s Role in Alleviating Rural Poverty in Nepal: A Socio-economic Analysis. South Asian Network of Economic Research Institutes (SANEI) Pakistan Institute of Development Economics. July 2008. Pp 1-56. Retrieved 22 June, 2011 from http://www.saneinetwork.net/research/sanei9/Study%2012/Abstract.pdf
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