Critical Assessment of the Claim That Microfinance Has Poverty Reduction and Gender Impact - Coursework Example

Critical assessment of the claim that microfinance has poverty reduction and gender impact Contents Contents 2 Introduction 3 Discussion 4 Addressingthe concern of the people below the poverty line 4 Arguments in favour 4 Arguments against 7 Women are more successful microfinance customers 8 Conclusion 11 References 13 Introduction Microfinance is defined as a system that is used to provide financial services to the poor or especially the people who normally do not have access to financial or banking related services. In delivering financial services to the poor two main mechanisms are followed. One of the mechanisms is relationship based banking for the individual entrepreneurs and small business. Another is a group based model. In the group based model the entrepreneurs come together as a group and apply for the loan collectively. Microfinance is used in some areas such as South Africa to describe the supply of financial services to the low-income employees, similar to the retail finance model that is prevalent in the main stream banking. Microfinance is defined by some people as a way whose objective is to form a world in which both poor and non-poor people have permanent access to the similar range of financial services including features such as savings bank, insurance and fund transfers. There is also a belief amongst certain microfinance providers that the microfinance helps to lift people out of poverty. While there are studies in the field that generally support this idea that microfinance helps in lifting people out of poverty it is not always so. That is to say that, Microfinance should not be considered as a tool that can be used to end poverty. There should be other alternative strategies that should be used to end poverty and microfinance should be seen as a silver bullet that will work like a magic tool to remove all poverty. Some other people view microfinance as a tool or way that can be used in order to promote economic development, employment and growth through the support of micro entrepreneurs and small businesses. The following pages do a critical evaluation of the statements that the microfinance has a positive impact on the lives of the poor people or in other words micro finance helps in reducing poverty and gender. Discussion Addressing the concern of the people below the poverty line Arguments in favour The 1990 World Bank report defined those people who lived on less than $1 per day as the persons who are extremely poor and the persons who live on less than $2 per day as poor (Banerjee and Duflo, 2006). If the spending trend of these persons is analysed in detail then it is found that most of these persons do not spent entire or most of the amount in buying food and the significant amount they spend is on intoxicants. They spend quite a lot of money on festivities and other social occasions and very less the forms of entertainment that is quite prevalent in the urban households that is watching movies etc. In many countries it is also found that the women engage in multiple occupations in order to sustain their living. It is also found that amongst the poor people’s substantial fraction of them in the sense that they indulge in raising capital, carrying out investments and also act as full residual claimants to the earnings. The micro financial services have contributed in generating considerable amount of interest amongst the academicians, donors and other practitioners of development as an alternative way to provide finance for the poor people by the government rural assistance schemes (Hulme and Arun, 2009). The failure of the government based rural assistance scheme lies in the fact that the credit allocation is biased towards the urban population, the transaction costs is much higher, there are restrictions related to the interest rates, high chances of default and there are corrupt practices that exists. Figure 1 Microfinance to reach the lower income group (Source: Kiva, 2015) As shown in the above figure microfinance can help the financial services to reach the lower income people. The failures of the government based schemes aimed at providing finance to the rural population have resulted in the growth of other innovative financial institutions in several parts of the world that have begun to prosper and attracting the attention. The microfinance institutions are involved in serving clients that are normally excluded by the formal banking sector. The development of the microfinance sector is generally based on the assumptions that the poor generally possesses the capacity by which they can implement income generating activities but are limited by the fact that they lack access to and are inadequate in the provision of savings, credit and insurance facilities. There is a common belief that the poor people do not actually save but in actual practice it is not so. There are comprehensive impact studies that demonstrate the fact microfinance helps the very poor households in meeting of basic needs and protecting people against risks. The financial services that are used by the low income households are associated with improving the economic condition of the households and growth and stability of the enterprise. It is found that the poor people who have better access to the savings, credit, insurance and other forms of financial services are made more resilient and are far better equipped to face the daily crisis situations. The most rigorous of the studies in this field have established the fact that microfinance can indeed smooth the consumption levels and reduce the need of the households to sell assets in order to sustain their living (Khandker, 2005). Access to the microfinance enables the poor people to better cope with sudden increased in expenditures due to unforeseen events. Access to the microfinance helps the poor in accessing and taking advantage of the economic opportunities that exists (Banerjee, Duflo, Glennerster and Kinnan, 2014). While it is a known fact that that an increase in earnings cannot be said as automatic, but when the clients are provided with the sources of credit that they can rely on then that they can plan and expand their business activities much more effectively. It is also found that the clients that the poor people who join and remain within the program for a long time have better economic conditions that the people who have never joined the program. In Indonesia for example the average income of the clients of Bank Rakyat Indonesia increased by 112% and about 90% of the total households were able to come out of poverty. Some studies also show that if considered over a long period of time then it is also found that the micro credit facilities do help some people to gradually come out of poverty over a long period of time. As the microcredit and other function of the microfinance societies provide the people with a credible line of finance, they allow the poor households to come out of their day to day survival goal to a period where they can plan for the future. As the lines of credit become secure the households are able to send their children to schools for a period that is much longer and can make much more investments into the future of the children for a longer period of time. The financial services also help the rural poor seek a better quality of living better food with more nutrition content. Increased financial stability also means that the clients can go in for health checks whenever they feel ill and not wait for them to become seriously ill before they actually consult a doctor. Arguments against Although microfinance is immensely beneficial in fighting and alleviating poverty, it should be appreciated that microfinance is just a strategy that is being used to battle a huge problem. Over the past two decades or so there has been credible progress that has been made in providing micro finance and especially financial services to the poor people. The most common microfinance service that has been used is microcredit service. Microcredit service has been most commonly used to provide credit line to the poor people (Hulme and Arun, 2011). However unlike any other loan the borrowers taking the loan must be capable of repaying the loan amount along with the interest or the loan taken would push them into greater debt burdens. Microcredit is viewed by some people as one size fits all although, it is not so. What needs to be done in administering microcredit facility is that individual cases should be carefully evaluated on the basis of merit before allowing credit to the people. That is instead of adopting the one size fit all method microcredit facilities should be carefully evaluated against all the alternatives and only that should be administered which is most appropriate to the situation.  It is to be understood and appreciated that in certain situations where the conditions pose severe challenges to the standard microcredit methods the microcredit may be inappropriate to apply. Populations which are geographically much disperse in nature or are nomadic may not be suitable candidates for the microfinance to be applied. Even in case of population where there is a high incidence of debilitating diseases the microfinance and specially microcredit may not be an appropriate model to be applied. Other problems with the population that can make microfinance difficult to applied may include dependence on a single crop for sustenance or depending on a single economic activity (Cull, Demirgu¨c¸-Kunt and Morduch, 2009). The population which depends on barter rather that cash transactions are also not suitable case where microfinance may be applied. Other factors that may prove as a barrier to the application of microfinance are economic factors that are related to hyperinflation and absence of law and order. In certain other situation where there is a prevalence of laws that restrict the sustainability of microfinance providers then microfinance or more specifically microcredit is much more difficult to be applied. Women are more successful microfinance customers In order to understand the fact as to why women are more successful microfinance customers than men it is to be appreciated that in a household men are the owners of the large business. So as a customer the commercial banks favours men over women. Another factor due to which the men get preference over women from the point of view of large commercial banks is the fact that it is the men who own most of the assets. These assets are normally used by the banks as collaterals to secure the loan that they are providing to the customers. As the women do not own these assets, so they cannot go to the large commercial bank to ask for loan for any economic activity that they may like to pursue. Another reason behind the preference of female customers by the microfinance and microcredit provider is the nature of the business. The microcredit institutions provide loans for the businesses and self-employment for the businesses that are in the informal sector. Normally it is the women who are associated with these informal sectors and so are the preferred customers of the microfinance societies. There are other factors too such as the fact that the demands of the women customers are much stronger than that of the male counterparts. This is due to the fact that women are more financially constrained than women. So it happens that when the women form part of a microcredit organization they normally form part of a society and jointly the society seeks loans, arranges training and repays their loans jointly. This is better for the microfinance institutions as the women take loans jointly so they are much easily swayed by peer pressure and normally do not default on their loans. In fact a study found that there were greater percent of male who faced difficulty in paying back their loans and lesser percent of women who faced the same difficulty. Another reason for preferring female over male as borrowers is the fact that when provided with loans female are more conservative in their investment strategies and do not misuse the funds provided to them as loans. This was also evident from a study in Guatemala that found that women who were provided with credit facilities were least likely to misuse the provided funds. Other reasons for providing credit facilities to the women are the fact that women are amongst the most oppressed members in a society (Angelucci, Karlan, and Zinman, 2014). They are more concerned about the children health and education as compared to the male counterpart. The women are also more likely to be the victim of domestic violence and are likely to be oppressed by the social norms. Reports show that women are lagging behind in many indicators of social development. In addition to the above facts lies the fact that in several regions, especially in the poor hamlets the sex ratio is very skewed that is the no. of women per thousand men is very less. This is due to the fact that female health is often neglected as a child and also the prevalent practice of female infanticide. Thus the microfinance in addition to the upliftment of the economic condition of women may help in certain respect to upliftment of the social condition of women. Microfinance helps in improving gender equity and it also involves greater wellbeing for the households. It is also found the impact in almost all the cases have been positive. In case of the Grameen bank in Bangladesh it was found that initially the bank struggled to get the first 50% of women but now the no. of women is 95% (Chemin, 2008). It was also found that income of Grameen bank members were 43% higher than income in the non-program villages (Roodman and Morduch, 2014). In respect of the gender impact of microfinance it is appreciated that microfinance is generally targeted at the female or woman customers. This is because of the facts that assets in a household are mainly controlled by the male counterpart who can use them as collateral to secure loans from large banks but the women do not have any such assets and so they are more interested to secure and get loan from the microfinance institution. In respect to securing of loan, it has been observed that the loan provided to the women are more in number as compared to the men since the loan that is availed by the women will be provided to the men for expanding of their business. The micro finance institutions that has been established or introduced with the objective of providing women empowerment have made women more physically and mentally strong. Maximum business that is carried out by the micro finance institutions are being operated by women and it has been observed that the number of business that is operated by women are found to be more successful as compared to the business that is owned and managed by men. Micro finance has extended their hands towards the poor women. Women play a major and a vital role in carrying out the household operations and businesses. The women that are engaged with the micro finance institutions have become more focussed on the activity or the performance of the micro finance institution that is carried out throughout the world. The microfinance institutions that have been established or carry out its operation in South Asia have mainly focussed and emphasized on its clients that are women rather than considering its men clients and he women are organized in various loan groups. The micro finance institutions have increased the economic participation of the women and therefore it increases the women empowerment which has resulted in establishing and maintaining of the balance between men and women. The achievement or the success of the women as micro finance customers can also be observed from the fact that the use and the application of the financial services by the women are related to the improvement and development of the economic welfare of the households and the stability or the growth of the enterprise. Women are provided more credit facilities as compared to the men since women are less prone to spend money as compared to the men in terms of its non-productive or non-fruitful activities. The main priorities or concern of the women is their children, nutrition, household requirements, school fees etc. Therefore the main aim or the objective of the women is the welfare of their families. Women are now focused on improving their businesses and therefore it is required that women’s are expected to improve their skill in dealing with the marketers, suppliers as well as the customers. Therefore from the above points and justifications it can be assumed that the women are found to be more successful as compared to the men. Conclusion The topic of discussion that has been analysed within the scope of discussion of this paper is related to a critical evaluation of microfinance. In particular the paper is aimed at evaluation of the statements that is the role of microfinance in reducing poverty and the gender impact that microfinance has. The second part of the critical evaluation that is the gender impact of microfinance focuses on the aspect of microfinance that microfinance is more focused on providing financial services to woman or rather female customers. After assessment of the two statements it is found that microfinance as an institution helps a lot in providing financial services in the rural households. It is a very astonishing fact that although microfinance is focussed on the poor in the rural households the rate of default of microfinance is much less and almost 90% of the loans that is given through microcredit a branch of microfinance is paid back. In the rural sector microfinance particularly helps as it provides the poor persons an access to the financial services. The microfinance also helps the rural entrepreneurs by providing them microcredit facilities in order to establish their business. Although there is research that supports the fact that microfinance helps in generating employment opportunity and providing opportunities for the eradication of poverty, it is to be known and appreciated that microfinance is not a silver bullet that can help eliminate poverty. References Angelucci, M., Karlan, D. and Zinman, J., 2014. Microcredit impacts: Evidence from a randomized micro- credit program placement experiment by Compartamos Banco. Working Paper. Banerjee, A. V. and Duflo, E., 2006. The Economic Lives of the Poor. Available at < http://economics.mit.edu/files/530 > [Accessed 4 April 2015]. Banerjee, A., Duflo, E., Glennerster, R. and Kinnan,C. 2014. The Miracle of Microfinance? Evidence from a Randomized Evaluation. Available at < http://www.nber.org/papers/w18950 > [Accessed 4 April 2015]. Chemin, M., 2008. The Benefits and Costs of Microfinance: Evidence from Bangladesh. Journal of Development Studies. 44(4). pp. 463-484. Cull, R., Demirgu¨c¸-Kunt, A., and Morduch, J., 2009. Microfinance Meets the Market. Journal of Economic Perspectives. 23(1). pp. 167-192. Hulme, D. and Arun, T., 2011. Whats Wrong and Right with Microfinance – Missing an Angle on Responsible Finance? Economic & Political Weekly. XLVI(48). pp. 23-48 Hulme, D., Arun, T., 2009. Microfinance: A Reader. NY: Routledge. Khandker, S. R., 2005. Microfinance and Poverty: Evidence Using Panel Data from Bangladesh’. World Bank Economic Review. 19(2). pp. 263-286. Kiva., 2015. About Microfinance. Available at < http://www.kiva.org/about/microfinance > [Accessed 4 April 2015]. Roodman, D. and Morduch, J., 2014. The Impact of Microcredit on the Poor in Bangladesh: Revisiting the Evidence. Journal of Development Studies. 50(4). pp. 583-604. Read More