Micro-Finance - Essay Example

Review of Related Literature Micro-finance means the provision of “small-scale financial service to people who operate very small or micro-enterprises, who work in agriculture, fishing, and herding, and who provide services and other individuals or groups at the local levels of developing countries both rural and urban” (Robinson, 1996 in Dhar, 2005, p. 9). The origins of micro-finance is traceable to 1944, as cooperative movements by Germany’s Raiffeisen Society, and in England by Rochdale Pioneers. However, the term “micro-finance” became popular in the 1990s, in particular after the World Summit for Social Development, held in 1995 in Copenhagen. During the summit, the importance of access to credit by low income classes, women, and other vulnerable groups, was emphasized. In 1997, the movement gained another boost with the holding of the World Micro-Credit Summit in February 1997 in Washington, DC. During the summit, a countdown was announced, to the year 2005, for the eradication of poverty among 100 million of the world’s poorest families, targeting women in particular with micro-credit aimed at self improvement (Dhar, 2005). In the last 20 years, microfinance has proven to be a vital development tool capable of addressing the needs of vast number of poor people, in particular poor women, with a means of sustainable financial support for their livelihoods. In the 2005 State of the Microcredit Summit Campaign, microfinancial institutions were reported to have reached more than 92 million clients, in the process benefiting as many as 333 million family members. Poor people are no longer seen as charity recipients but customers to be attended to and served; of these, women comprise 83% - roughly 66 million – of reported microfinance clients. And not only are they better clients than men, being better repayers, but they also act as key drivers of development, channelling their extra income directly to the benefit of the family (McCarter, 2006). Micro-Finance Conceptual Framework Even prior to its being called “micro-finance”, forms of small-scale financing have already been afforded to very poor families in developing countries such as India. However, with the advent of the term “micro-finance”, there appears to be a paradigm shift in the perception of people to the new facility. The old concept encompassed providing credit, at subsidized rates of credit, to poor families residing in rural and semi-urban areas, through public and government financial institutions (Dhar, 2005). Under the new concept, the target is rural and urban poor households, emphasising on women borrowers, and aims for the provision of finance for the purpose of asset creation and stressing the principle of “Borrower knows best” (Kaladhar, 1997 in Dhar, 2005, p. 10). Innovative features include the user-friendly delivery of credit and facilities, easy and fast disbursement of loans of small amount or short maturation, vigilance in maintaining high recovery rates through peer pressure, incentives such as access to large loans after successful settlement of the first loan, and employment of peer pressure and peer support to encourage savings. Micro-finance also now includes a broad range of financial and non-financial services, such as entrepreneurship development, capacity building, and skills upgrading. Under the new paradigm, financial intermediation with self-sustainability of institutions is emphasized, with the results measured in both quality and quantity of financing made available (Dhar, 2005). Dhar (2005) cites the following basic premises on which the operational framework of micro-finance rests are: a. A viable means for poverty amelioration is creation of self-employment programmes or projects. b. Access to capital is a major constraint in forming micro-enterprises. c. The poor, specially the poor women, have the innate capacity to save and mobilize their savings into productive economic activities. d. Since credit can follow thrift, very small loans can be given to the poor to enhance their investment capacities. e. The borrower knows best how to utilize the money and then arrange for repayment of loans. f. Financial service delivery systems are decentralized and people’s organizations at as facilitators and intermediaries. g. Repayment periods are generally short. The amount of loan may be increased based on the borrowers’ past credit history to gauge his record of loan repayment. This is commonly known as the loan graduation process. h. Loans to members are not concessional and are usually quite high. i. Loans given by micro-finance institutions should involve simple procedures for reviewing and processing loan applications, and quick sanction and disbursement of money (Dhar, 2005, p. 11). Some researchers have questioned, though, the new directions taken by some micro-finance programmes, contending that it is questionable whether such services truly benefit women. There are those who argue that in many current models of micro-finance, the main, at times overriding, emphasis is financial sustainability, which tends to divert resources from strategies that would emphasize more empowerment and poverty alleviation (Mayoux, 2001). Presently, there are four main views concerning the potential benefits of micro-finance to women’s empowerment and sustainability. According to Mayoux (2001, p. 246), they are as follows: a. optimism about possible global development of sustainable micro-finance programmes empowering women; b. recognition of limitations of existing models, but possibility of sustainable strategies, minimizing negative impacts and enhancing contribution to empowerment; c. provision of financially sustainable micro-finance programmes important as a strategy for poverty alleviation; empowerment as an issue to be addressed by other means; and d. current emphasis on micro-finance programmes a misplaced diversion of resources from more effective empowerment strategies (Mayoux, 2001, p. 246). The four view above are not mutually exclusive, and cut across some underlying paradigms (Mayoux, 2001) For instance the Financial Self-Sustainability Paradigm has for its main origin and inspiration the models of micro-finance promoted by USAID and CGAP, based on the 1997 Micro-Credit Summit in Washington, DC. As such, it is currently dominant within most donor agencies. Its reason for targeting women is efficiency consideration arising from high female repayment rates. It main policy focus is the setting up of financially self-sustainable micro-finance programmes that increases access to micro-finance services for large numbers of poor people. Its aim is economic empowerment, expansion of individual choice and capacities for self-reliance Another paradigm is the Poverty Alleviation Paradigm. Its main origin and inspiration here is the integrated poverty-targeted community development programmes. Its reason for targeting women is the higher levels of female poverty and responsibility for household well-being. Its main policy focus is to pursue micro-finance as part of an integrated programme to alleviate poverty and vulnerability and increased well-being for the poorest households. Economic Empowerment In the Economist, a picture is drawn of the typical morning in a Kampala slum in Africa. Men sit around in circles getting drunk on local millet beer, while the women get busy supporting their families by running the Otim bar. They brew the intoxicating drink in a large oil drum with a Shell logo visible on the side, and the business is said to have grown rapidly, in large part due to the availability of micro-credit. The availability of micro-credit has been considered quite fortuitous in these parts, because poor people cannot usually borrow from commercial banks for lack of collateral. It is possible for the poor to borrow from loan sharks without security, but at usurious rates of 10% to 20% per day, leaving them poorer than ever, and failure to pay results in severe bodily harm (Economist, 2001). Microlenders in Bangladesh have adopted the Grameem model, wherein one of a group of rural women take out a microscopic loan (i.e. as little as US$25) to start a business, and it is only when this loan has been repaid that the next woman in the group may borrow. The application of peer pressure keeps default rates very low (Economist, 2001). There are areas where poor people often move, and therefore do not know their neighbors well. In Africa and Latin America, stepped-lending is considered more effective. A prospective borrower puts up a little money of her own, and the microfinancier lends her the same amount as her portion. Upon prompt repayment, she is allowed to take out a larger loan. With every improvement of her credit record, the higher the sum she is allowed to borrow. The incentive of being allowed a higher level of credit is what ensures that default rates are low (Economist, 2001). According to the Microcredit Summit Campaign (MSC), about 14 million poor people are currently availing of micro-credit, with each borrower believed to be supporting an average of 5 family members. Microlenders prefer to lend to women, because any additional income brought about by the micro-credit is used to feed and clothe the children. Men, on the other hand, usually spend their extra cash on intoxicating liquor (Economist). Microcredit is thought to work better than handouts because (1) it fosters the formation of small enterprises, and (2) it can be self-sustaining when well run, as repayment rates of higher than 98% are common (Economist, 2001). Problems in Microcredit In many poor countries, disease disables the borrower, causing default rates to rise. This was experienced in Africa where the spread of AIDS either made the borrower too ill to work or because the family’s medical bills rose too high. Microborrowers were surveyed in 14 African states, and it was found that 95% of those surveyed had difficulty defraying medical expenses, 77% needed to pay for funerals, and 50% encountered difficulties finding money for the orphans of relations who succumbed to AIDS. Wherever possible, microlenders link health and hygiene education programs to the loan grants, but a more efficient way that is explored by FINCA (a microlender in Uganda) is to combine microcredit with micro-health insurance. The scheme is to allow members free medical treatment (for different health conditions) at a nearby mission hospital in return for a small quarter fee. Effectiveness of Microfinance Programmes Assessment of the effects of microfinance programmes on the empowerment of women has generated inconclusive and mixed results. Some findings support the observation that microfinance is able to induce sustainable economic, social and political empowerment, but others indicate that there exist evidence pointing to the deterioration of the over-all well-being of women. A study conducted a household survey in South India, in order to determine the importance of the borrower’s gender and the lending technology for intra-household decision-making processes. The aim is to discover the effectiveness of decision-making agency in creating favourable results in microfinance programs. The study found that direct bank-borrower credit delivery poses no challenge to the prevailing decision-making patterns in the home, regardless of whether the credit recipient is the male or the female in the household. However, when the credit is so structured that the facility is combined with financial and social group intermediation, women’s group membership significantly shifts overall decision-making patterns, from following norm-guided behaviour/male decision-making, to joint and female decision-making. The longer the group membership and the more intensive the training and group meetings the borrower attends, the more permanent the patterns (Holvoet, 2005). Another effect of microfinance programmes has to do with the empowerment not only of women, but of women with disabilities. The disabled of any gender faces considerable obstacles in their daily lives, and because of the disparity between the social roles of men and women, women with disabilities encounter great difficulty in participating in economic development initiatives. Lewis (2004) states that microfinance services had failed to deliver poverty alleviation and women’s empowerment, moreso in the case of disabled women. The study espouses that development projects be made more accessible to women with disabilities, and in many cases to seek them out intentionally. There is also a need to build the capacity of organisations that are led by women with disabilities, and to engage them in global dialogue on microcredit schemes that would be more responsive to their particular situation. It is worthwhile to explore creative funding approaches to pay for disability-related costs (Lewis, 2004, p. 38). McCarter likewise urges that microfinance has not been able to do as much as it should have been able to do. Gender equality and womens empowerment: a critical analysis of the third Millennium Development Goal.Full Text Available By: Kabeer, Naila. Gender & Development, Mar2005, Vol. 13 Issue 1, p13-24, 12p Taking action to improve womens health through gender equality and womens empowerment.Full Text Available By: Grown, Caren; Gupta, Geeta Rao; Pande, Rohini. 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