Impact of Micro-Finance on Economic Development

Topics: Microfinance, Poverty, Economics Pages: 12 (3740 words) Published: October 31, 2010
In both developing and emerging economies, microfinance has vastly and increasingly been seen as one of the most important means for enhancing the lives of the poor and therefore a major tool for economic and social development mostly in rural areas. Lately, contrary to this widespread belief, critics have raised eyebrows against this growing popularity of microfinance as a major tool for enhancing economic development. Contrary to belief, they are of the opinion that microfinance is a ‘make-belief’ that is hindering economic and social development rather than enhancing it. It is to this regard and in light of these growing controversies therefore, that this essay intends to take a critical look at the context “microfinance” in order to make an informed judgement on this growing controversy. Before ascertaining the impact of Microfinance on economic development, it is imperative to first take a cursory look on what Microfinance is all about, its characteristics and the way it differs from traditional banking and therefore take a critical look at the criticisms surrounding it, so as to come up with the right judgement concerning the role it plays towards economic and social development. What is Microfinance?

Traditional banking system has widely been regarded as unfit for the illiterate poor with no guarantees, as such ad hoc products designed to fulfil the needs of potentially billions of peculiar and unconventional borrowers, might prove successful in enhancing wider financial access, with a positive objective of bridging inequalities and fostering economic development (Visconti, 2008). It is to this regard, that the World Bank in 1996 established a Consultative Group to Assist the Poor (CGAP), directing entirely about $200m in funding of microfinance projects (Rogaly, 1996). The term micro-finance has over the years generated a lot of definitions by various authors. Armendáriz and Morduch (2010) have documented that despite several claims as to the origin of microfinance, the best known story is that of Muhammad Yunus and the founding of the Grameen Bank. Traditionally, microfinance was narrowly directed towards the delivery of project oriented, subsidised and supply driven small lending (micro-credit) products. Going by the United Nations’ definition; “Microfinance is defined as the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to the poor and low income households and, micro-enterprises” (Oyunjargal and Nyamaa, 2002; p.7). Precursors of microfinance institutions (MFIs) comprised of rural money lenders that are often similar to usurers, credit groups or co-operative groups; whereas the operations of the MFIs are similar to standard banks with peculiar mode of operation or characteristics (Visconti, 2008). Characteristics of Microfinance

Classification of microfinance institutions varies; as they can be grouped according to their organisational structure namely; cooperatives, solidarity groups, rural or village banks, individual contracts and linkage models etc (Bogan, 2008) or to their legal status such as; NGOs, cooperatives, registered banking institutions, government organisations and projects etc (Visconti, 2008) or better still, according to capital adequacy standards, ranging from “Tier 1, mostly regulated MFIs to Tier 4 start up MFIs” (Deutsche Bank, 2007 ; p.6). Furthermore, steel et al. (1997) suggested the classification of MFIs into three broad categories namely: (i.) Other peoples’ money (grants and donations), (ii.) Members’ money (Share capital contributions and savings and (iii.) the general public’s money (Retail deposit). The organisational characteristics and business operations of microenterprises and small businesses (MSB) can be influenced by the type and nature of financial services provided by MFIs. Although there maybe differences arising from demands with particular reference to MSBs which is dependent...
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