The Role of Micro Finance in Poverty Alleviation


 


Microfinance refers to a broad category of financial services including microcredit,


savings, insurance and fund transfers given to low-income clients or solidarity lending


groups such as consumers and the self-employed, who due to circumstances, lack


access to banking and related services. In rural areas of developing economies, many


activities usually classified as financial are not monetized, because poor people have


very little money, but may need it or the things it can buy as circumstances arise.


Promoters of the service believe that such access will help alleviate poverty in poor


 people. Microfinance is seen as a means for socio-economic development, as separate


from charity and as more effective if focused on women because they are less likely to


default on loans than men. The microfinance program has the objective of getting poor


people out of poverty through borrowing, establishing microenterprises and increasing


income. It emphasizes the need for poor people to reduce their money vulnerabilities


by retaining more earnings and building up their assets, and to have a safe place for


saving and withdrawing money as needed, in order to better manage household and


family risk.[1]


 


Microfinancing is also tapped in promoting renewable energy technologies to alleviate


poverty and sustain development in the rural areas of the world. The introduction of


green and eco-friendly technologies such as renewable energy from wind, water and


solar sources, bio-fuels development from natural resources and bio-waste recycling in


the underdeveloped villages of India can be implemented by microfinancing through


public and private sector agencies.[2]


 


Microfinance as a tool for poverty alleviation in developing countries has been


recognized since the1990s as shown by the formation of microfinance


institutions (MFIs) worldwide and the increased participation of non-governmental


organizations (NGOs) in this program. The World Bank and UN Development


Programme have also recognized its potential and have contributed to its development.


Microfinance eliminates conventional banking bureaucracies by simplification of


paperwork and the building of banking centers in villages. It enables small loan


sizes, emphasizes on using loans to start employment-generating microenterprises,


does not need tangible collateral, but asks borrowers to open savings accounts and


build financial assets. Microfinance also requires MFI loan borrowers to attend training


and group meetings to build capacity for entrepreneurship.[3] Microfinance empowers


women in rural communities by upgrading their decision-making in the household


because of their acquisition of entrepreneurial and financial management skills, and


also promotes a sense of self-respect and dignity to its poor clients.[4]


 


The focus on credit at the expense of microsavings and the desire to invite Western


investors to the program have caused peer-to-peer platforms to emerge in expanding


microcredit through individual lenders in the developed world. These funds will be


sourced locally in these countries to lessen transaction costs and exchange rate risks,


although the use of flat rate methodology instead of the familiar banking Annual


Percentage Rate in the reporting of some of the borrowers’ interest rates can lead


lenders to believe that their borrower is paying a lower interest rate than what they


are really paying.[5]


 


However, according to critics, the real impact of microfinance on poverty alleviation at


the global level is not supported by rigorous research, that the MFIs’ charging of high


interest rates affects poor borrowers and that it must adapt new approaches in serving


clients in developed countries because of the more complicated economic structures


there. The usual reliance of MFIs on donations from various organizations, foundations


and governmental agencies also does not make them self-sustainable, because the


frequency and amount of donations cannot be relied on.[6] Microlenders have also been


criticized for not looking after the working conditions of poor households, specifically


when borrowers turn into laborers, marketing their products through an MFI-controlled


organization. There have also been reports of the diversion of foreign aid intended for


 MFIs in underdeveloped countries for entirely different uses.[7]



 

[1] “Microfinance”, Wikipedia, 25 May 2011, <http://en.wikipedia.org/wiki/Microfinance>


[accessed 31 May 2011]


[2] Neeta Aurangabadkar and A. D. Diwan, “Role of Microfinance for Promoting Integrated Rural Development and Poverty Alleviation”, Articlesbase, 2011, <http://www.articlesbase.com/wealth-building-articles/role-of-microfinance-for-promoting-integrated-rural-dev>  [accessed 31 May 2011]


[3] Kathryn Mordeno, “Microfinance: The Path to Poverty Alleviation”, 19 April 2010, <http://stjliblog.wordpress.com/2010/04/19/microfinance-the-path-to-poverty-alleviation-by-kathryn-mordeno/>  [accessed 31 May 2011]


[4] ibid


[5] “Microfinance”


[6] Kathryn Mordeno


[7] “Microfinance”



Credit:ivythesis.typepad.com


0 comments:

Post a Comment

 
Top