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The Role of Microfinance Institutions in poverty eradication
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Submitted by Ruhangayebare D... on Mon, 23/01/2012 - 8:18am
Microfinance Institutions have played a big role in contributing towards poverty eradication and reduction in the economies of developing World.
In Africa Microfinance Institutions have for the most part made their clients economically dependent due to cultural, political as well as social problem.
Considering the fact that their programs are designed to support clients to be engaged in micro and small businesses, which paves way to be self-employed, and in the mean time to contribute to the family income, their programs are recently focusing to support members in various forms.
Some of the programs are designed strictly to follow a credit system, while some are designed in an integrated manner by incorporating a package of programs on entrepreneurship, Microfinance institutions see the background of the clients’ situation in the economy and conceptualize empowerment by emphasizing on the economical participation.
They also focus on the different approaches utilized to alleviate poverty starting from the objective and prospect of the respective clients.
The UN General Assembly resolution 52/194 of 18, December 1997, emphasises the relationship between micro credit and the eradication of poverty.
It also reflects the success of small scale lending programs such as those provided by Microfinance Institutions.
These rely on lending (usually a few hundred dollars) to small enterprises in agriculture, distribution, crafts, trading and similar activities.
The participatory nature of these projects, together with the emphasis on women entrepreneurs and employment creation, has raised hopes of reducing poverty through this approach.
The research we carried out on Microfinance Institutions’ customer satisfaction in Uganda highlights the strengths and weaknesses of the micro credit approach, including the administrative difficulties and limited linkages with other services for the poor.
Suggestions for strengthening operations and a particular plea for ensuring that micro-credit projects are established in a broader context of support to the small enterprise sector should be emphasized if Microfinance Institutions are to achieve their aim of poverty eradication.
The importance of Microfinance Institutions’ improving access to credit for small rural or urban producers, landless farmers and other people with low or no income, with special attention to the needs of women and disadvantaged and vulnerable groups should also be underlined.
Governments are called on to review national legal, regulatory and institutional frameworks that restricts the access of people living in poverty, especially women to credit on reasonable terms; to promoting realistic targets for access to affordable credit, providing incentives for improving access to and strengthening the capacity of organized credit systems to deliver credit and related services to people living in poverty and vulnerable groups; and to expanding financial net works, building on existing networks, promoting attractive opportunities for savings and insuring equitable access to credit at the local level.
It is generally recognized that Microfinance Institutions respond effectively to the ever changing needs of the people.
For example, in response to the effects of globalization, people continue to choose Microfinance Institutions to address their needs.
In a number of countries, people are starting new enterprises in such areas of social care and information technology because of benefiting from Micro-Credit.
Women and youth are also choosing the Micro-Credit form to start enterprises of their own, thus creating new jobs and opportunities
Microfinance Institutions are setting industry standards by putting into practice the values and ethics.
In some countries, Microfinance Institutions are seen as leaders in promoting food safety and security, and in protecting the environment. Still in others their group lending schemes are building peaceful societies by promoting understanding and collaboration among people of different cultural and income backgrounds.
Though Microfinance Institutions have played a big role in poverty reduction in developing countries, there are still service gaps that need to be filled.
In my own view, I would recommend an improvement in the flow of information about lending and borrowing policies and strategies from top to bottom and vice versa.
This will fill some of the knowledge gaps especially at the community level and enhance clients’ confidence in the management of micro credit.
The governments need to also develop popular versions of rules and statutes governing Microfinance Institutions such that they do not exploit the clients by charging high interest rates.
Repayment periods should also be harmonized such that by the time the repayment date reaches, the client will have realized some benefits from the loan.
Comments
#1 Thanks Dominic for the
Submitted by Darius (not verified) on Wed, 15/02/2012 - 12:23pm.
Thanks Dominic for the refreshing article however you need to edit some typos such as in Africa microfinance institutions have made their clients economically "independent" not dependent. Microfinance should not be confused with microcredit but in any case microfinance is not a panacea to poverty. A lot of other interventions can be done for the very poor at the bottom of the pyramid through donor and government humanitarian and livelihood interventions. The question many people in the NGO field fail to understand is that MFIs have to be sustainable and by so doing they try to reach to the bankless people who are involved in an economic activity but do not have the ability to join the mainstream consevative financial institutions. Mainstream MFIs lead from the front by going to remote areas where other financial institutions have shied from be it the mainstream or commercialbreak hence breaking this debilitated myth. Unfortunately with the incessant drive towards commercialization of microfinance comes the danger of mission drift as focus shifts from the client satisfaction towards economic bottom line of the institution as new shareholders with vested interest purely on return on equity jump on board and few years down the line driven by greed to unlock their return on their equity propose to list the MFI on the public stock exchange market. These class of shareholders simply rock with money as their initial investments grow by tenfolds. As the listed MFI gets new shareholders who do not share in the initial mission of the MFI simply vote to commercialize it into a commercial bank and lose touch and base with its clientele. Unfortunately, an MFI cannot compete with mainstream commercial banks as they attempt to upscale since this is not their turf. Eventually it goes under with millions of poor peoples money, hardwork and sweat of years toiling to grow the MFI.
As a contrarian I suggest continued debate on this subject of commercialization of Microfinance.
#2 This article is well
Submitted by Joseph Unufegan (not verified) on Mon, 23/01/2012 - 8:32pm.
This article is well articulated. However, it needs to stated that microfinance no matter how well implemented can only have a dent on the category of poor that can operate or own some form of business. When poverty is seen from the point of view of income improvement microfinance no doubt helps. However, poverty goes beyond just a mere increase in income. To have a significant impact on poverty reduction, other approaches or treatments need to be put in place that takes care empowerment, loss of dignity, socio-cultural values that debases particular gender irrespective of what they have? Besides, the hardcore poor are often ignored by the micro finance institutions just as the conventional banks do. Such category of poor do not invest their loans on any enterprise rather they use it for immediate consumption.
Finally, it need to be said that the poor are not a monolithic group. There are the not so poor group, poor and the hardcore poor. Micro finance institutions may help the first two categories of poor but certainly not the hardcore to reduce poverty. The hardcore poor who may just be in the majority may require special welfare packages, public work program from government in order to reduce their poverty. For micro finance institutions to be sustainable they can not serve this hardcore poor. The dilemma is blending sustainability with outreach of services has been one of the major headaches of micro finance institutions.
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