Is microfinance developing?

[ilija_z]

I first became aware of this seemingly fantastic ideal of helping the poor through provision of financial services in my university study. However, all you hear in the media outlets is how banks are pocketing record profit, executives are receiving ridiculous salaries and the list goes on. Why is it that we do not hear of the Bangladesh Rural Advancement Committee (BRAC) providing microfinance (supply of loans, savings, and other basic financial services) to the poor? In regions where BRAC operates there is increased household expenditure, children receive better and longer schooling and there is a decrease in malnutrition. This is just one example and there are many more from around the world yet the public is oblivious to this increasing phenomenon. It seems to work, sure there could be some corruption where people might be exploited but if this area received even a fifth of the regulation that banks receive, why not promote it?

Are we a society that says we want to solve the poverty problem yet we are content in sending a dollar a day. True these could be the views of an idealistic person who has had no formal exposure to the workings of the corporate world, but I still think we should be made more aware of such shifts.

 

[jkhamisjkwoka]

Financial services for the poor have proven to be a powerful instrument for poverty reduction that enables the poor to build assets, increase incomes and reduce their vulnerability to economic stress through increased savings. The “World council of Credit Unions” reports that in 2001, 146 popular banks in Rwanda had 274350 savings accounts and 43216 borrowers. This demonstrates that the poor have a high savings rate when capable, and as experience shows, the poor value security above all other considerations.

Introduced in the 1970’s, Microfinance became a method to supply loans, savings and other basic financial services such as consumer credit, pensions, insurance and money transfers. Although the poor present higher default risk, microfinance can pay for itself by achieving sustainability through lowering transaction costs, offering services of greater use to their clients and obtaining a large market share.

However, there is very little empirical data to support the success of microfinance as a sustainable instrument in aiding the poor. This is due to the impossibility of microfinance institutions charging low interest rates because of the high administration costs associated with establishing small loans. Also microfinance is difficult to monitor in countries with low government and other financial institution regulators in the marketplace. The key strategies that governments can assist microfinance with include maintaining macro stability and to avoid interest-rate caps that prevent MFI’s from covering their costs and operating sustainability.

On a larger scale, some argue that overemphasis on microfinance to combat poverty will lead to a reduction of other assistance to the poor. These alternative methods include employment programs, grants, investments in infrastructure and government welfare.

The general outcome to microfinance portrays a positive outlay for the poor as the benefits allow poor households to make the transformation from “everyday survival” to “planning for the future”. In Practice this may be more difficult to achieve due to economic factors and non-financial circumstances. Microfinance is more effective in theory than in practice.