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