Microfinance for Poverty Reduction

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MICROFINANCE AS A STRATEGY FOR POVERTY REDUCTION
INTRODUCTION
Microfinance is not something new in Malaysia. It has been operated by credit unions, co-operative banks and specialised credit windows of banks. Microfinance services of financial credit range for about RM10,000 (USD2,631) and mostly to finance small businesses, agricultural loans and loans for poverty reduction. Microfinance program in Malaysia has been implemented since 1987 as one of the poverty eradication strategies in the country. There are three large microfinance institutions in Malaysia namely AIM, YUM and TEKUN that targeted to different groups of people. Each of the microfinance institution has its own lending systems and has been subsidized by the government since their existence. Majlis Amanah Rakyat (MARA), council of trust to the Bumiputera and Credit Guarantee Corporation (CGC) are some of the pioneers to introduce microfinance loans to its borrowers. The rural credit institutions comprising of Agriculture Bank of Malaysia (BPM), Farmers Organisation Authority (LPP), Federal Land Development Authority (FELDA), and agro-based Co-operative Societies provide micro credit for the agriculture sectors. There are a number of non-government organisations (NGOs) that engaged in microfinance. These include Yayasan Usaha Maju operating in Sabah, Koperasi Kredit Rakyat in Selangor and the best and significantly known microfinance institution (MFI) is Amanah Ikhtiar Malaysia (AIM).

Background of the study
This study research about microfinance and its strategy to reduce the poverty among Malaysia’s citizen. Microfinance was introduced in Malaysia during the last three decades. Two types of institutions namely banking institutions and non-bank institutions offer microfinance programs. Banking institutions that offer microfinance products are Public Bank, AM Bank, EONCAP Islamic Bank, CIMB Bank, Alliance Bank, United Overseas Bank, Bank Simpanan Nasional, Agro Bank and Bank Rakyat. The issue of poverty has been a major concern to many nations, particularly the developing countries. Poverty has been defined as a situation where a population or a section of the population is able to meet only its bare subsistence, the essentials of food, clothing and shelter, in order to maintain a minimum standard of living (Balogun, 1999). Low productivity and poorly functioning markets for agricultural outputs are among the causes of poverty as indicated in the government’s poverty reduction strategy paper. Small scale farmers rely on rudimentary methods and technology and they have limited skills and inputs such as improved seeds that would increase yields. Rural poverty in Malaysia

Remarkable progress has been achieved in poverty eradication in Malaysia. In the early 1970’s almost half of households were classified as poor while in 1997 the incidence of poverty had significantly declined to 6.1% However, the crisis brought a slight upward swing at 8.1% in 1998. Efforts by the Malaysian government to counter the effects of the crisis bore positive results when the incidence of poverty was reduced to 7.5% in 1999. By 2005, the incidence of poverty was targeted to reduce further to 0.5% (Abdul Rahman Hasan and Sa’idah Hashim, 2001). Poverty is both a social and an economic problem. Eradicating poverty from society is everyone’s dream but in reality it is still around even in economically developed countries. Governments have responsibilities to eradicate the poverty or, at least reduce poverty rates. In fact, poverty reduction is everyone’s social responsibility. This is significant because Malaysia is shifting towards an industrialized economy and starting to enjoy economic growth but there are still so many people who are under the poverty line.

Definition of terms
1. Microfinance
Microfinance is a provision of a broad range of financial...
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