Is Microfinance Effective - Essay Example

IS MICROFINANCE EFFECTIVE? by Is microfinance effective? Microfinance is a resource of financial services for small businesses and entrepreneurs who lack access to banks and related services. Microfinance can also be defined as financial services for low income and poor clients, which is different by different service providers. Microfinance institutions offer small loans to low income clients to help them in establishing themselves and starting small businesses and unsalaried borrowers. The institutions use methods such as group lending, gradually increasing loan size, pre-loan saving requirement and a guaranteeing access to future loans after renewal of present loans. Therefore, microfinance refers to a movement that envisions a world in, which low- income households and self-employed people have undeviating access to a variety of high quality and reasonable financial services. The services are offered by a range of retail providers to build assets and finance income-producing activities, as well as protection against risk (Armendariz & Morduch, 2010, p. 40). The microfinance services include credit, insurance, savings, and remittances, payments among others. Microfinance besides giving financial aid to low income earners and poor people provides non-financial products such as health services and business development in poor communities. A question that is frequently being asked is whether microfinance is effective it can be said that the sole purpose of creating microfinance was to improve the lives of people. For example, the people who receive loans from the microfinance are women, as they want to find adequate money to take care of their families and grow their businesses. Therefore, with low interest rates from the microfinance they women are able to reach their ultimate goal of improving their businesses and taking care of their families. This is to say that the microfinance is effective as they help women and low-income borrowers to reach their potential. Microfinance has also proved to be very effective in that despite yielding financial services to low income borrowers it has established some social return. In that by improving the lives of poor people through financial services, which have increased their incomes they have the capacity to for social needs. For example, the poor with the help of financial services the poor are able to access good health services; proper housing and they can put food on the table for their families as well as educate their children. Microfinance is effective in that they are the catalyst to alleviating poverty where people are able to climb out of poverty with the help of the financial services and non-financial services they receive from the microfinance. There has been a growth over the years in the microfinance industry where the institutions have given individuals the opportunity to become self-sufficient in a way that they can access social services. People are given the opportunity of innovation as they have a financial opportunity to realize their potential (Armendariz & Morduch, 2010, p. 89). For instance, through microfinance young people have opportunities to bring out their ideas into reality as they have the capital to start up businesses. Microfinance also creates job opportunities for unemployed people in the society. Unemployment has been on the rise in the world and people are looking for alternative ways to find an income. Microfinance has given people opportunity to open up small business and entrepreneurs have been given the opportunity to realize their ideas. This gives people the opportunity to compete in the financial markets. According to Derban, microfinance is the concept that finds the balance between providing financial services and improving the lives of people; however, it is viable commercially. This means that everybody needs to be banked even the poor people, microfinance has played a significant role in improving the lives of people. Microfinance has played a significant role in the recognition of the Millennium Development Goals in that they have galvanized the development of communities by improving their welfare for the world’s neediest people. By having Microfinance in most regions of the world, there has been an enhancement in mobilization of new resources that have helped in reducing poverty and hunger, empowering women, improving the health of people and lowering child mortality. Reason being people are now able access proper medical care, which has in turn lowered child mortality and reduced HIV /AIDs and other infectious diseases. Therefore, through microfinance most countries have been able to achieve the MDG’s that have been set. Through the availability of financial services provided by Microfinance, people have the ability to achieve their goals. Microfinance has created awareness in most countries as they have come up with ways to help people and educate them on how to use their loans. Poor people come up with ways to improve their lives and with the help of the microfinance; they are able to start up businesses. The MDG’s goal is to eradicate poverty in the world and by creating new businesses; this goal is achieved. The people who benefit the most from the Microfinance is the governments of several countries because it ensures the number of people living the below poverty level is decreased. Microfinance has been effective in different ways, but it has been faced with many criticisms on whether the institutions are effective in the way of reducing and eliminating poverty in the world. For example, some critics say that it is not true that Microfinance eradicates poverty, but they increase the problems of the poor people. Reason being the poor people sometimes find it hard to pay up the loans and the microfinance ends up taking what they have earned over time. Therefore, the low-income earners end up becoming in a worse state than they were before they took the loans from the microfinance. Microfinance has placed an interest rate on the loans that people take and for that reason, critics say that there is no difference between them and normal banks. Critics further state that the purpose of the microfinance is to assist both financially and commercially and not to help people achieve their goals and have access to social services (Armendariz & Morduch, 2010, p. 110). For that reason, critics say that the microfinance is not as effective as they are expected to be by people who rely on them for creating entrepreneurial opportunities. Therefore, microfinance does not play any significant role in the lives of poor people and low-income earners who think of how to alleviate poverty. In conclusion, although the microfinance faces much negative criticism, it has played a significant role in improving the lives of people. It has also helped in the realization of the Millennium Development Goals and for that reason; I would say that it has been effective. Additionally, microfinance has helped in the reduction of HIV/AIDs and infectious diseases as people concentrate more on how to perfect their lives, as well as through education and knowledge that has been created through the microfinance. Reference Armendariz, B., & Morduch, J. (2010). The economics of microfinance. Cambridge, Mass, MIT Press. Read More