Microfinance and Poverty Alleviation

Question: Discuss about theMicrofinance and Poverty Alleviation. Answer: The Effectiveness of Microfinance in Poverty Alleviation Introduction It is through microfinance that the poor are enabled access to sustainable financial services; this makes the role of microfinance a very difficult accomplishment. Churchill and Frankiewicz (2006) noted that its really a difficult task and that why banks have been avoiding it for long. They noted that the bank would have started carrying it out a long time ago if it were an easy task. What makes it difficult to engage into is the small profit margins associated with its operations. The poor people are very many and require small amounts of money. Thus, very many small transactions are involved and are very costly. The working conditions for a microfinance are quite challenging and they cannot compensate for this by charging a higher price. This paper will cover some of the challenges facing Microfinance institutions. It will consider the empirical evidence that actually confirm on how MFIs have contributed to poverty alleviation. Through this, the instances when microfinance is an ef fective tool and also when, will be noted. The founder of Grameen bank Muhammad Yunas started the Microfinance in a small village with small number of people and has become successfully integrated as an effective weapon of poverty alleviation from Asian countries to other countries of the world (Mandal, 2012). Microfinance task force is defined as the provision of credit, thrift and financial products to the poorest people in small amounts (Abdalla, 2013). The major concern of the study is to answer the questions posed by many economists such as; why the rapid popularity that the microfinance is gaining? Is it a business where good money is made? Is it a good weapon for poverty alleviation? Is it profitable? It will also cover the reasons why most investors havent considered investing in a microfinance institution. If it is aimed at dealing with the poorest in the society whose probability of default is very high, is a microfinance sustainable in future? Microfinance if directed tow ards various kind of clients could be more effective that it is today. Whether Microfinance Reduces Poverty There are more than a billion poor people with no access to financial services. Ledgerwood (2006) noted that microfinance have been used in many countries as an important tool of poverty reduction. The regulatory framework for the microfinance is a major concern by the policy makers. He also noted that development could be achieved through the policy makers authorizing and licensing a huge number of MFIs. It is a ways to channel government spending towards achieving development. This statement not only has microfinance proven effective through the decades; it is also practiced worldwide validates the efficiency of microfinance in poverty reduction and thus its an effective programme that has been used for three to four decades (Mandal, 2012). Microfinance is not a subsidy, nor a charity, nor is a down to bottom approach, but its an approach that empowers the poorest section of the society. It was targeted to help those in the rural, urban and semi urban to help them improve their living standards by raising their income levels. The definition of International Labour Organization (ILO) confirms the usefulness of microfinance in poverty reduction. The definition is that, it is an approach of economic development that involve the provision of financial services to low-income clients through various institutions. The integration of development on the effectiveness of microfinance is to help the poor people to meet their level of different needs. The main objecti ve for the initiation of microfinance was to ensure that the immediate credit requirements for the poor people were met. Many other developments beyond saving and credit facilities have been achieved with time. The movement and development of microfinance recently is under a framework that shows how people moves from one level of poverty to another. This framework is under four phases; the financial intermediation, social intermediation, civic intermediation, and livelihood intermediation. The intervention at this phases according to Mandal has proven to be successful for many economies. Xing (2015) noted the following operation of the MFIs. They provide capital to the poor who have no collaterals to access loan from banks; the money lend is small and since the poor are aware that they have to repay this money back, they use it to start a business that would yield cash flows. After completion of repayment, bigger loans are advanced and the businesses keep growing. The MFIs prefer advancing loans at joint group liability to minimize the possibility for default since an individual could easily default by running away from the village, but a group of villagers cannot run away (Dinc?er and Haciog?lu, 2014). Therefore, poor individuals form groups with people they trust (the MFIs are not aware of the riskiness of the people in the society, thus allowing the individuals to choose their group members would result in trustworthy groups; they avoid untrustworthy group in their group making), training is provided, loans are advanced to each individually, continuous monitoring and training continues. Microfinance serves the poor through two broad categories; the delivery and the enabling approach. The delivery approach is based on the opportunity for financial services availability that the microfinance gives to the poor people. This approachs role is to propose financial products and services to the poor and leave them to make their own choices. An example of a model with the delivery approach is the Joint Liability Group which has been an important framework for lending by these institutions. The enabling approach was advanced from the delivery approach and the understanding was broadly engaged by practitioners. In this approach, the group is owned by the member, regulates activities and decides their byelaws. Agbola, Acupan and Mahmood (2017) on their study on whether microfinance reduces poverty noted that poverty level is so extreme such that one person is a group of five is considered to be multidimensionally poor. Their new evidence from the study on Northeastern Mindanao, the Philippines shows proved that microfinance has a positive impact on reducing poverty by increasing savings and income for the low-income group (Mohapatra, 2009). In an analysis of the Indian crisis, it was noted that the role of microfinance in the provision of credit is rapidly expanding. Panagariya (2010) argued that is first important to understand what role the microfinance intends to meet by advancing the loans in the assessment of the microfinance roles and the delivery modes. He noted that the eradication of poverty is the loftiest goal that the microfinance claim. A study on Indian crisis noted that microfinance loans are only a temporary transfer of income so as to smooth a temporal consumption that cannot be considered as an alleviation of poverty. But regardless of what the funding is meant to perform, it helps in the ups and downs that results from a poverty blow. In the rural areas, informal sources are the main contributors of small loans. These sources include; relative, friends and moneylenders. For the formal sources; banks, self-help-groups and the MFIs are the major providers. However, the effectiveness of MFIs have been criticized on the basis of operating for profit. The poor people in many countries have received a remarkable welfare improvement from the MFIs as noted by many evidences. Now the challenge that face these organizations is the issue of sustainability. Income given today will reduce poverty today. What about the future sustainability? Will the MFIs still be able to keep the poverty level lower, or are they going to l ose their gains? An empirical analysis by Katsushi and Azam (2010) on microfinance in rural Bangladesh provided results that confirmed that microfinance has actually contributed positively to poverty alleviation on the group that used the funds productively. In order to facilitate this role, they noted that the MFIs are obliged to monitor their borrowers to ensure that the borrowed funds are not diverted to other uses other than what they were meant for. When and Where Microfinance can be an Effective Tool If MFIs operated on a non-profit making basis, its major role of poverty alleviation would be enhanced since these institutions would avoid diverting the funds to other uses that are more profitable. Since they are allowed funds access at a low interest rate, they should stick to their primary goal of helping the poor. They should not be allowed funds access at a lower interest rate and at the same time be allowed to invest in profitable projects. The MFIs could be more effective if they were more efficient in monitoring the usage of the borrowed funds. The major reason why most people default on their loans is that they fail to observe the initial intentions before the loan is advanced. If the MFIs would come up with a better strategy to ensure that funds are used appropriately, cases of default would be minimal and the effectiveness of microfinance would be restored. Katsushi and Azam (2010) argued that irrespective of the purpose the loan is intended for, productive loans should r aise the consumers income and reduces the poverty whip. They also noted that in the past years (1998 specifically), this can be confirmed to be true since the loans helped in reducing poverty level significantly. This effectiveness has greatly reduced in the current decade. This means that MFIs are not targeting the proper clients. An improvement on the target group would result in a significant drop in poverty level. The limitation of microfinance should not be on the credit saving goal alone but should also seek to go beyond this. In addition to meeting the financial needs of the poor, it should also seek to meet the social, political, cultural and economic needs. If it achieved this role, the empowerment could be considered to be true and sustainable. An effective microfinance is the one that address other issues beside the need for basic goods. In a rural area where people only have land as their only asset, and furthermore this land is owned communally, it is difficult for a single member to use such an asset to obtain capital from a bank. This is where the importance of microfinance comes in; these people are able to obtain capital without providing any asset as collateral. Generally, MFIs can be argued to supplement the financial gap that banks have failed to close. It play similar role to that played by banks where potential investors borrow to start new innovations or for business expansions. Women are the target group by MFIs (Katsushi and Azam, 2010); this is the group that is said to be responsible spenders. Men are exposed to too many unnecessary spending such as alcohol consumption, cigarettes, etc. Very few women are exposed to such cases. Therefore lending to women could really help in poverty reduction in their homes. This would result in the microfinance being considered to be an effective tool. There is an argument against the most vulnerable people being excluded from the MFIs clientele. This is because they are considered creditworthy borrowers and are required to provide grants in order to access the loans. But the major question is who could guarantee a loan for a person who is greatly whipped by poverty? Of course none. This explains why poverty level goes up even with the presence of MFIs. If the most vulnerable and real poor could have access to microfinance loans, definitely the poverty level will greatly be reduced. Microfinance for Integrated Development All around the world, microfinance institutions currently have been progressive in introducing other services and products beside credit facilities and savings. It has been argued that microfinance has been found to be the most lucklative and best way to address the community, and has also been found to facilitate the provision of other services. Microfinance and the Fight against Hunger and Malnutrition The most critical problem facing developing countries is that of hunger. Food security is the biggest worry that face the biggest proportion of the world economies. The following are 3 criteria for food security; The food is available in sufficient quantities, appropriate quality, and is supplied through either domestic production or imports. Individuals and households have access to adequate resources and the food they acquire be of high quality for nutritious diet. Food utilization through sanitation, water, adequate diet, and health care. It can be noted that not only does hunger extremely whip the poorest in the society, it also involves, water, sanitation, adequate diet and health care. This has created the rationale for the initiation of incentives to fight hunger on the vulnerable group. Criticisms Some evidence noted that the loans offered by these institutions are between the poor and the non-poor but nowhere to deal with the poorest. Nowadays, MFIs do are in competence with formal financial institutions since they are looking forward to making short term profits that would sustain them to the future. This has resulted them in avoiding the group that actually need their help to another level of the lower poverty class; these are the poor, whereas its meant for the poorest. According to Panagariya, sustainable poverty eradication hasnt yet been recorded anywhere. The microfinance scholars has claimed that there has been no evidence for the claim that microfinance have had a significant influence on poverty reduction. Since collateral is not available to the poor entrepreneurs, they always remain unfunded which undermines the primary role of microfinance. Hard evidence on the success of microfinance on the alleviation of poverty is unavailable. The microfinance associates have observed that funding mostly goes to high returns projects which is contrary to the intended objective. Though the commercial banks window of concessional priority-sector-lending allows the MFIs to access low-interest funds, they are making huge profits from this by lending to profitable projects rather than allowing the poor to access it at a lower rate. The findings from empirical evident has created an insight that MFIs have not only concentrated their financial activities on the peri-urban and the urban dwellers, they have shifted to offering their credit to only those with moderate income level. Further, the products offered are profit based or are concentrated in a common geographical location; this has deterred the incentives to include the most vulnerable such as the orphans in to system either directly or indirectly through their guardians. The concentration of microfinance on women clienteles has created disputes in many homes due to the man being discourage by the woman having a greater income than the man and thus undermining his manhood. This results in fights in these homes. It also increases the debt level for the low income group especially when they losses their paying ability. Lastly, microfinance is not universally applicable to the sick, the old, young, the physically challenged, and also for the mentally challenged (Telesca, Stanoevska-Slabeva and Rakocevic, 2010). Conclusion Many empirical evidence have confirm that microfinance have had significant positive contribution in poverty eradication. However, there have been a degradation of its effectiveness over time. If proper action and the right policies are put in place, the primary role of MFIs would be greatly enhanced. Most MFIs and non-governmental lending organizations have agreed with the argument that funding the poor through microfinance would result in poverty alleviation through increment in income and savings. The effectiveness of the microfinance in poverty reduction could be improved by provision of monitoring of a higher level and ensuring that loan purpose is observed. MFIs offer group lending where no collateral is require as the groups use guarantee systems (Gasco? Herna?ndez, Equiza-Lo?pez and Acevedo-Ruiz, 2007). Due to the MFIs becoming much profit oriented, it has deprived the most vulnerable group and the real poor the access to microfinance loans which has resulted in many people l iving below the poverty line. The staggering potential of microfinance has started being recognized by many world economies. Economies with better regulations for their microfinance have benefited much from its importance role of reducing poverty. The operation of MFIs on many economies have not been effective and thats explain why some economies have no recognition on the importance of microfinance. Recommendations Since its the role of the government to maintain income equality in an economy by alleviating poverty, it should use this paper to clearly confirm from the provided empirical evidence that the microfinance is an effective tool. It should therefore formulate various policies and reforms that would assist the microfinance institutions to expand and more to be initiated. Improvement in access of financial products and serviced would be a greater tools for poverty reduction. Owing to the critiques provided above, the government besides promoting access to credit, it should also regulate all microfinance to ensure that their possibility for deviation from the intended role is lowered. Microfinance could be made better off and achieve great results; but this requires an understanding of the strengths, challenges and limitations that are faced by its operations. The government should also subsidize the microfinance to ensure that they will be sustainable in future even with no profits. It could also provide insurance against the falling of such institutions. The policy makers should have a clear understanding of the intended roles of microfinance and set appropriate regulations. The government should ensure that MFIs are non-profit based to enhance their efficiency. The most vulnerable group should be the most important clientele for microfinance firms and this should be monitored by the government to ensure that the regulations are followed. References Abdalla, A. (2013). The influence of financial relations on sustaining rural livelihood in Sudan: reflecting the significance of social capital in the village Al Dagag, North Kordofan State. 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