Role of Microcredit Institutions in Reduction of Poverty - Research Proposal Example

? Role of microcredit s in reduction of poverty CHAPTER INTRODUCTION Background of the study Poverty eradicationis a dream which the whole human society aspire to realize by ensuring all their efforts are geared towards containing poverty and addressing its causes. The government has also taken into consideration those living below a dollar per day by allowing and encouraging microcredit institutions to offer small loans with less restriction as an incentive to microfinance. The argument in this proposal is that investors can lose substantial opportunities for growth in their investment if they choose inappropriate or unstable financial structures. By structures we mean primarily banks and other financial institutions, insurance companies, trust funds, investment houses, stock exchange and savings and credit cooperative societies (Sacco’s). Microcredit is offered through Sacco’s to boost the government’s endeavor in availing financial services and create a vibrant and globally competitive financial sector that will create jobs and also promote high level of savings. Microcredit is ways of empowering citizens with assistance to stabilize their investments to enable them prosper and improve their standards of living. It also contributes to entrepreneurs’ spirit by provision of advice and close monitoring of their businesses or investments. Statement of the problem Before the introduction of micro credit institutions, banks were the only financial institutions offering financial services. Due to the collusive oligopoly situation created by banks their services became only accessible to a certain group of people who had a high level of income. Their interest rates and the limited amount to be borrowed were high and one required collateral to qualify. The accessibility of their bank loans and close monitoring of their investment was a problem for many investors. This disadvantaged the poor and the small business community who were not able to qualify for the credit facilities hence leading to the development of microcreditors such as SACCOs. These SACCOs chipped in to bridge the gap and provided the missing link to services needed by entrepreneurs. Their lending is as low as US $150. This study explores why citizens have not yet fully taken advantage of this incentive yet the introduction of this SACCOs was aimed at raising their financial capabilities through investment. General objective The main objective of the project is to evaluate how microcredit institutions have facilitated in eradication of poverty in many countries. Specific objectives To establish whether the micro credit loans are easily accessible to as many citizens’ world wide, to establish whether citizens once granted the loans, utilize the same in investment and if so, do they save the returns from investment? To determine whether the investments improve their wellbeing status in the society, that is, to reduce the absolute poverty levels in the community. To establish whether the interest rates on the loans offered by the microcredit hinders them from expanding their business ventures and to find out the relationship between micro-finance institution services and business growth. Limitations of the study Limited time to collect enough data may result to inadequate information thus affect overall outcome. Data collection and documentation will require adequate financing which if not amply provided may adversely affect the efficiency of data colllection. Some respondents may not be willing to give accurate information due to little knowledge in areas of research. Significance of the Study The study will be of great import to the citizenry to appreciate the presence of micro-credit departments in Sacco’s. The study will help micro-credit institution clearly understand where they are failing as far as small business operations are concerned and improve on their current practices. The study will help the government appreciate the role played by micro-credit on development of small businesses and on poverty eradication. The study will help researchers have a broad understanding on microcredit activities and therefore explore on areas which have not been covered and the willingness of the SACCOs to fund their projects or investments. Scope of the study The study seek to establish the effects of micro-credit loans on citizens’ investment in the saccos .The study will involve administering questionaires to branch manager, credit officer and sacco members whom SACCOs finance. CHAPTER TWO: LITERATURE REVIEW Main review Microcredit definitions differ due to the following: the loan amount, the target group whether they are low income household or micro entrepreneurs and how the funds will be utilized in improving the society. The various definitions of microcredit were as follows; Microcredit is the extension of very small loans (microloans) to people under poverty designed to spur entrepreneurship. A little loan especially granted to a poor person to enable him become self-employed. Microcredit refers to loans in small amounts to small-scale entrepreneurs. Microcredit is a financial service where small amounts of money (usually around $50-$150) are loaned to poor people (Srinivas, 1997). In essence the role of entrepreneurship and small business has evolved considerably since the Second World War. What was once considered to be perhaps a necessary drain on western economies has become a central strategic instrument for competitiveness in global markets. Just as it has been important to understand how to manage entrepreneurial firms It has now become at least as important to understand how to achieve entrepreneurial society while this emphasis on small entrepreneual firms as engines of dynamic efficiency may seem startling after decades of looking at the corporate giants as engines for growth and development, it may not be so now. By being more cautious about lending and this is after evaluating the business undertaken by the owners, as SACCOs are doing. Raising bank income by increasing commission and charges develop a specialist lending department to ensure consistent and reduced risk. Look beyond security values in favor of business capacity to generate cash necessary to service and repay the debt without the need to sell assets in small business management (Acs & Audretsch, 2001). Successful entrepreneurship depends on much more than capital. Business knowledge and vocational skills are prerequisites to access microcredit. Hence, efforts that build poor people’s entrepreneurial capacities are definitely still needed. A SACCO is owned by its members, who make decisions about policy issues through their voting rights. The SACCOs involved in financial services can trace their roots back to the Schulze-Delitzsch and the Raiffeisen Cooperatives initiated in Germany in the mid-1850s. Today, hundreds of thousands of SACCOs are found all over the world. Nevertheless, there is generally little knowledge among donors and researchers about SACCOs, and often the SACCOs receive little appreciation in the literature and from donors and authorities. However, SACCOs have several potential advantages: SACCOs provide members with a unique opportunity to learn and practice democracy. SACCOs are “locked-in” with their members. Different from shareholder firms and NGOs, a SACCO cannot decide to leave its beneficiaries. Hence, as long as the SACCO exists, the members can continue to benefit from its services. SACCOs provide their members with important savings services and the savings are recycled (given out as loans) locally. Hence, the money is not diverted into the hands of the rich through loan grants as in normal banking. When they depend mostly upon members’ savings, SACCOs are independent structures that don’t overly depend upon donor support (Roy Mersland, 2007). Microcredit has being instrumental in reduction of poverty in Bangladesh. Credit through microcredit institution has being able to reach low income earners who holds less than 0.5 acres of land as they join in credit groups to access this loans and hence uplift their living standards. Members of microcredit organization were allowed to borrow and have a long repayment period where they paid up with ease as they had acquired enough for their households and had increased deposit rate hence reducing poverty levels in the country. Government intervention in reducing interest rates charged in loan helped Bangladesh women to acquire loans and invest more hence reducing poverty within the populace. Social mobilization and education helped in reducing poverty levels (Zaman, 1999). Microcredit institutions have spread their networks to the poor in the society and have strategies in offering services which are beneficial to the poor in the community. The society is fully involved in the running of the institutions and become members hence have the privileges of acquiring loans that are repayable through long periods unlike the formal and legal procedures in financial institutions which lock them out of the market. A survey conducted in Peru has proofed that the country poverty index has reduced by over 20% due to introduction of micro credit institutions which are purely owned by the villagers and have their own informal way of lending among themselves (Zeller & Johannsen, 2006). Increase in number of microcredit institutions has effect on reducing overall poverty in a country. Microcredit institutions should focus mainly on the woman and the poor who have no collateral to access bank loans. Village owned microcredit organizations and Sacco’s offers solution to them as they will ensure they work hard and invest more to increase employment and also improve their welfare hence in aggregate they will alleviate poverty levels in the society(Lensink, Meesters & Hermes, no dates). Microcredit institutions have created an atmosphere that enables the poor in the society to have access to financial services with low interest rates and need no security to secure it and this has increased investment levels in the country. These investments have created jobs and have in general increased national gross domestic products. Through this the poverty levels have dropped drastically in areas where there is presence of such lending institutions. Products offered to the poor should be frequently monitored and education should be oftenly facilitated to increase the way their understanding of how to handle the loans issued to them to avoid misusage (Ghalib, 2011). CHAPTER 3: RESEARCH METHOLOGY AND DESIGN Introduction This chapter gives a summary information regarding the methodologies to be adopted and used in this study .The aim of the study is to present conditions of this phenomenon and predict the future conditions. It describes the research design, target population, sample design, data collection procedures and methods to be utilized for analysing the data that will be obtained. We will use primary data obtained from reseach made questionaires. Research design The research will use descriptive research design since it seeks to describe the way things are done in the organization.This research entails the effects of microcredit loans on citizens investments.This descriptive research is an appropriate method that suit the problem in the study topic since it will concentrate on registered members in Sacco. The research will seek views from sacco members, credit officers/microcredit officers and brach manager to assist in making conclusion. Target population The research study will target credit officers, credit managers and sacco members in different saccos. This means that it will seek to know those registered to the organizations. Sampling design This research will use primary data through use of questionaires by taking a sample of 100 respodents. Simple random sampling technique will be used in selection of sample . Sample size The study will select at random a total of 100 respondents:80 sacco members, 16 microcredit officers and 4 credit managers. We will use random sampling to pick the respondents. Data collection method The researcher will use open ended and structured interview questionnaires in order for the respondent to give their maximum views. The questionnaires will be used to collect information from branch manager, microcredit officers and Sacco members. The questionnaires will be preferred because the study is concerned mainly with variables that could not be directly observed such as views, opinions perception and feelings the respondents through questionnaires. Data analysis and presentation The primary data collected will undergo central editing whereby all questionaires received from the field will be checked for completeness and errors. Afterwards this responses will be coded and analized using frequency tables, pie charts and bar graphs. Descriptive stastics namely percentiles, mean,variance and standard deviations will be our major techniques of calculating our required results. The analized data will be presented using charts, percentages and tables. This will be done using statistical package for social scientists (SPSS). References Acs and Audretsch 2001, Understanding enterprise, entrepreneurship and small business by Simon bridge, Palgrave Macmillan,UK Ghalib, AK 2011, Estimating the depth of microfinance programme outreach: empirical findings from rural Pakistan, The University of Manchester, UK Lensink, R, Meesters, A & Hermes, N (n.d). Outreach and Efficiency of Microfinance Institutions: is there a trade-off, www.aiccon.it/File/evento/Lensink.doc? Mersland, R 2007, ‘ Danish NGOs and microfinance,’ A learning process facilitated by www.prngo.dk Zaman, H 1999, Assessing the Poverty and Vulnerability Impact of Micro-Credit in Bangladesh: A case study of BRAC, http://notunprojonmo.com/wp-content/uploads/2011/07/E16-micro-credit-n-BRAC.pdf Zeller, M & Johannsen, J 2006, Is There a Difference in Poverty Outreach by Type of Microfinance Institution? The Case of Peru and Bangladesh, info.worldbank.org/etools/docs/library/.../ZellerJohannsen_paper.doc? APPENDICES RESEARCH QUESTIONAIRE This is questionnaire is designed to gather information on the effects of micro-credit loans on members in their investment growth. Kindly provide information to all questions in this questionnaire. You are hereby requested to avail the information by ticking the appropriate box or fill the information as required. You are required to use extra sheets if need be. SECTION A QUESTIONAIRES FOR TEACHERS Name (Optional)…………………………………………………………………………… Gender Male Female Age (Years) 20 - 29 40-49 30 – 39 Above 50 How long have you been a member of Sacco? a. 0 - 2 year c. 5 – 6Years b. 3 – 4years d. 6 and above Does your income affect your investment? [Yes] [No] What are the requirements for one to be able to access microcredit loan services? …………………………………………………………………………………………… Which services have mainly improved your investments? a. Advisory services [ ] b. Investment Monitoring [ ] c. Loaning/financing [ ] d. Training [ ] Which challenges do you face in accessing microcredit services? a. Conditions/policies [ ] b. Interest rates [ ] c. Accessibility [ ] d. Inefficiency of SACCO [ ] What loan amount have you received from microcredit? None ( ) $200-250 ( ) $ 250-500 ( ) $500-750 ( ) $750 and above ( ) How do you rate the services? Satisfactory ( ) Fairly Satisfactory ( ) Fully satisfactory ( ) Not satisfactory ( ) SECTION B: QUESTIONAIRES FOR THE MANAGEMENT How many customers do you support? 0-250 ( ) 251-500 ( ) Over 500 ( ) What services are majorly appreciated by members? ……………………………………………………………………………… ………………………………………………………………… What strategies are followed in offering services to members? ……………………………………………………………………………………………………………………………………………………………………………… Which services are mainly attractive to members and Why? ……………………………………………………………………………….. ……………………………………………………………………………….. What is the loan default rate? High ( ) Low ( ) Moderate ( ) Read More