Important Facts about Microcredit and Finance - Essay Example

Micro credit Introduction In many developing nations, the percentage of the population that have a bank account at a recognized financial institution is below fifty percent. Microfinance is largely regarded as having come up as a reaction to the formal financial sector’s failure to serve e rural population’s needs, those of the employees in the informal sector and those that live in poverty. The microcredit or small loans given to the poor individuals and those in the low-income bracket, was intended as a fair option to borrowing from the usual exploitative local lenders of money (Parmar, 2003). The success of Grameen Bank, which was started by Yunus Muhammad in Bangladesh has always been used as a demonstration of the creditworthiness of individuals that live in poverty and the possible positive socio-economic effect of microfinance. The Grameen Bank is popular for two practices of innovativeness; these are mainly serving female customers and giving loans to small groups or individuals that come together for common economical purposes, with shared liability that replaces monetary collateral. Being an approach that is market-based to fighting impoverishment, the focus of microfinance and microcredit is on the development of entrepreneurship and the expansion of self-employment (Abed, 2000). Presently, the institutions of microfinance serve about one hundred and fifteen million individuals. They have a close relationship with the customers, simplified processes and support extension to customers via group networks as well as some other resources, like a basic training on the repayment of loan. The industry has been highly diversified, reaching different sections of the society, though not usually reaching the poorest (Yunus and Weber, 2007). The providers also vary as they range from NGOs, cooperative unions, government and commercial banks, point-of-sale partners like post offices and shops, self-help groups and credit unions. Technology is increasingly assisting in the facilitation of access to the financial services and the reduction of costs of administration. The product portfolios are growing to encompass different kinds of insurance mechanisms and savings, remittance services and emergency loaning, demonstrating the rising recognition of the several financial empowerment’s dimensions. Important facts about microcredit and finance The battle against the availability of credit markets and hence against high rates of interests that the moneylenders demand is not new. They use the power of information concerning the potential borrowers and require different rates of interest from different individuals. Since the 1950s, governments recognized the fact that a large number of individuals did not have any other option but to be under the dominance of those monopolists. Consequently, there were implementations of programs where the governments subsidized the provision of credit to small-scale farmers in most developing nations (Parmar, 2003). Institutions of development finance and international donors did the delivery of inexpensive credit to the poor farmers. The difficulty in the examination of the application of the credit, the reliance on the donors, the wrong decisions on investment and low rates of repayment rendered the projects unsustainable. During the late 1970s, a new concept for the private program stared becoming significant. The savings of the customers contribute only less than a third of the money needed for loans. The approach demands much of the time of staff as well as that of customers, which can always be very expensive (Yunus and Weber, 2007). Such a financial institution does not apply any penalties on a group of people that take a loan if any of the members is either not in a position or not just willing to pay their share, and that the financial institution does not decide to exploit the group’s potential as a way of enforcing the liability on the group. In this view, some organizations’ contribution to the movement of microfinance start to show, for example, that the experience of the establishment of small loans could replace the physical security that the poor people are not able to afford by social security via the borrowers’ joint liability; for instance, by the joint duty of loan repayment concede to any group member (Parmar, 2003). This is an effort of reducing the costs of screening by the use of local insider information regarding the borrowers’ creditworthiness, and concerning the actual use of the credit, to avoid serious selection and problems of moral hazard. The serious selection problem happens because it is not easy to know exactly the amount of effort every member of the group will make in paying back the loan and hence the financial institution cannot differentiate between potential defaulters and good borrowers (Yunus and Weber, 2007). The methods of self-selection implies that this information, not known to the financial institution, is not provided via the formation of group, since none of the members will select a partner who will apparently default on the paying back of their loans. The problem of moral hazard happens when it is not probable, or even too costly to examine the activity for which a loan is being used by a borrower. Now, this is overawed by the fact that all the members have a program to examine the activities of the others for the purpose of avoiding that a loan not used in a proper manner by another will form an extra responsibility of payment on them. Ultimately, the group has the responsibility of paying back the loans if the person defaults (Parmar, 2003). Impacts on the developing world Poverty eradication The increasing significance of the microcredit’s role in the poverty eradication shows the latest success of programs of small-scale lending. During the early nineties, many institutions joined hands to make it possible for reproduction of the experience to some other nations (Association for Social Advancement (ASA), 1997). These initiatives relay on issuing loans to the small-scale businesses, agriculture, business, distribution and crafts. These initiatives’ participatory nature, in addition to the stress of female businesspersons and creation of jobs raised hopes of eradicating poverty via this method. Over the last decade, the institutions of microfinance have been successful in offering savings and credit services to the poor people that are entrepreneurial, via innovative approaches (Yunus and Weber, 2007). These involve the issuing of small loans to the poor individuals, particularly those in the remote areas, at full cost rates of interest, without security. Nevertheless, there is some vital opinion concerning this experience that is important to describe (Hashemi, 1997). It should be noted that it is not really self-sustaining in the view of covering all of its costs. It may not be easy to execute in instances where there are no such a homogeneous society. It is widely acknowledged that microfinance has appeared to be an important tool for fighting poverty particularly in Bangladesh and several other developing countries. There is a lot of proof based on the empirical studies that have increased over the past few years as regards the effect of microfinance (Parmar, 2003). Proof and experience show that microfinance and microcredit have established considerably a positive effect on the economic status of those borrowing and the condition of women in their households as well as the local community. The BIDS (Bangladesh Institute of Development Studies) has been following poverty in the country for several years (Parmar, 2003). The surveillance of BIDS shows that poverty has been on the decline by one percent every year. The number of individuals that live below the has seen a considerable fall to forty seven percent from the initial eighty percent during the early 1980s (Parmar, 2003). Whereas microfinance is not the only thing that is responsible for this success, it is acknowledged as having played a critical role. A study by the World Bank has produced proof of extensive effects of the microcredit on the status of the individuals taking loans. The studies analyzed the BRAC programs together with the BRDB (Bangladesh Rural Development Board, which is an organization of the public sector (Yunus and Weber, 2007). According to the results of the research, it was found that the is an increase in the per capita expenditure as a result of the microfinance or microcredit among all these programs’ borrowers (Parmar, 2003). The net worth of the household has also increased. A study by the BRAC examined the effect impoverishment in wider scope. The outcomes indicated that fifty two percent of the member households of the BRAC were living below the poverty line whereas a higher number, about sixty nine percent of the comparison households laid below that line (Parmar, 2003). The overall results demonstrated that among the members of the BRAC, there has been a slow but increasing improvement in the indicators like the house structure value, the level of cash income, the revenue earning assets, wealth and the total household expenditure. Empirical studies on the programs of microfinance of two other large non-governmental organizations, ASA and Proshika, gave the same positive effect. The impact evaluation of Proshika carried out between 1998 and 1999 showed positive outcomes of the initiatives in terms of raised income, rate of school enrolment, savings, decrease in the rate of infant mortality and improvements in the gender relations (Parmar, 2003). The impact examination of the program of ASA on its participants also had positive outcomes that showed an annual growth of five to seven percent in comparison with the control group, rise in the consumption of food, improvement in the child education and health, and higher assets increase. Women empowerment The removal of gender inequality and women empowerment has been a cherished objective of the non-governmental organizations and several other organizations of development in Bangladesh and some other developing countries. Microfinance has really created an effect on the female borrowers. Many studies have reviewed the level at which the microfinance has contributed to the empowerment of women (Yunus and Weber, 2007). Results of the researches indicate that the largest impact of the microfinance has been on various indicators that relate to female or women control over the knowledge of social matters and assets (Yunus and Weber, 2007). Loans that are given to the women have better impact that those given to the males. A small amount of funds works like a miracle in a society that is hungry for money and substantially raises the power of the woman in the family. An impact evaluation of the microfinance program of BRAC showed that the value effect of credit is quite larger for the category of women than it is for the men (Yunus and Weber, 2007). In addition, it was found that the access to credit by females greatly improves the welfare of the households as their income is mainly used to meet the needs of the households. Conclusion It is beyond any reasonable doubt that the microcredit and microfinance is a good program that has come to the rescue of many poor individuals. The initiatives have greatly impacted lives in the developing countries and their economies growing considerably. Poor farmers and business people are now in a position of accessing loans without strict procedures and at low rates of interests that they would otherwise not get from the other programs of loans by the financial institutions. Poor women are also empowered by the programs, which consequently changes the lives of many people as their income is usually spent on households. Reference Abed, F. H 2000, “Microcredit, poverty and development : the case of Bangladesh”. In Behind the Headlines. Vol. 57, No. 2/3 (pp. 12-19). Association for Social Advancement (ASA) 1997, A Study on the constraints to reaching the hardcore poor with microcredit. Dhaka : ASA. Hashemi, S. M 1997, “Those Left Behind : A Note on Targeting the Hard-core Poor.” In Wood G. D. and Sharif I. A., (eds.) Who Needs Credit? Poverty and Finance in Bangladesh. Dhaka. The University Press Ltd. Parmar, A 2003, "Micro-credit, Empowerment, and Agency: re-Evaluating the Discourse". Canadian Journal of Development Studies XXIV (3): 461–476. Yunus. M and Weber. K 2007, Creating a World Without Poverty: Social Business and the Future of Capitalism. PublicAffairs, New York. Read More