Challenges for Microfinance Organizations Serving the Poor

Anderson (2002) while highlighting the characteristics of MFIs, noted that the traditional sources of finance of MSBs are from family and friends and the informal market which consists of rotating savings and credit associations (ROSCA), various “club” system pooling members’ savings for loans, village banks, buyers’ advances (both in cash and in kind) and money lenders. He however noted that they may have some access to semi-formal microfinance institutions (legally organised financial intermediaries that are not regulated by monetary authorities) such as non-profit NGOs, large village banks, suppliers who provide credit and money brokers.

Microfinancing produces many benefits for poverty stricken, or low- income households. One of the benefits is that it is very accessible. Banks today simply won’t extend loans to those with little to no assets, and generally don’t engage in small size loans typically associated with microfinancing. Through microfinancing small loans are produced and accessible. Microfinancing is based on the philosophy that even small amounts of credit can help end the cycle of poverty. Another benefit produced from the microfinancing initiative is that it presents opportunities, such as extending education and jobs. Families receiving microfinancing are less likely to pull their children out of school for economic reasons. As well, in relation to employment,

In this documentary, Tom Heinemann (the director) provides a sharp critique of microfinance in the world. The documentary pertains critically to the work of Muhammad Yunus and the Grameen Bank in Bangladesh. Tom Heinemann tells an unpopular and confronting story about how microfinance, although innovative, leaves few to prosper and the many poor being financially “strapped”. This documentary has caused a flood of criticism about microfinance, while diminishing the reputation of Grameen Bank’s founder, Muhammad Yunus. I feel that The Micro Debt does not shed the full light onto microfinance, yet it is becoming increasingly hard to ignore its effects.

“Microcredit is about giving hope” Natalie Portman, (Natalie Portman Quote). Microcredit or microfinance, is the lending of small amounts of money at low interest to new businesses in the developing world, (David Siegel). People argue that microcredit I ineffective. But others disagree and say it’s the best way to win the fight against global poverty. Microcredit is an effective way to fight poverty because it’s easy to obtain, provides stability, and helps people build a new path for themselves.

Almost half of the world lives on less than $2.50. At least 80% of humanity lives on less than $10 a day. According to UNICEF, 22,000 children die each day due to poverty. Poverty is an ever-present issue that affects the lives of billions of people each day. There are many government subsidies that come into impoverished areas, but does money solve the issue of poverty? No, money alone cannot solve the world’s issue of poverty. In this paper, I want to discuss the role of microfinance in the developing world. Microfinance can be done poorly, which will continue to stunt the economic growth of an area, but if done properly microfinance can being human flourishment to a developing area. In order to take a closer look into microfinance, I will highlight the efforts that Kiva, an online lending company, has done to improve the economic horizon for many areas of the world.

Another criticism of microfinance is the aggressive techniques that used by MFIs in collection practices. (Brix & McKee, 2010) mention that because the aggressive techniques used by some MFIs, governments in India, Ghana, the

Microfinance, has to some extent improved and strengthened relations amongst women within communities. Microloans provided to women in groups ensures that the economic burden of repayments is one which women no longer have to bear alone but is instead shared, reducing the anxiety and pressure levels felt by women. The lending of microloans to groups of women, has created a sense of social solidarity, as women who are often in the same financial position can all contribute to creating successful microenterprises monitored and controlled by each other, reducing the risk of financial failure and collapse in addition to the reduction of collateral. This can be viewed as a

One of the most common forms of intervention that is imposed throughout the world to benefit both men and women (though primarily targeted at women) escape from a poverty trap is microfinance. Numerous studies about microfinance have been published, all of which seem to present a different perspective on whether the program is actually effective. One interesting study conducted in 2006 by Mark Pitt, Shahidur

Once the Era of apartheid had come to an end in 1994 the internationally development community entered South Africa promoting the microcredit model with high hopes to empower the poorest black communities to break loose from the poverty spiral, however the Microcredit model was seen to be having the complete opposite effect, ultimately causing incredible damage to the area. The microcredit model was supposed to be the means of bringing sustainable development to the extreme poor areas. The model has been named the “anti-development” intervention (1), because in practice it has only shown that it supports consumption spending. The poor are worse off than ever before; to keep up with the obligations of repaying their microloans, they are forced to sell the few assets they own or borrow money from friends or relatives or even worse take up new microloans in order to pay for the old ones. This is not the only downfall of this type of so called sustainable development; another problem that emerges from this is that the actual businesses emerging form microloans are anything but businesses elevating poverty. The type of business that has been arising from the microloans have only created hyper-competition amongst all the new businesses as well as the old ones, leaving about 40% of the South African population repaying debt. The poorest and most vulnerable are left behind to take care of themselves drowning in debt, while the private banks

It is said that a good deed can brighten even the darkest of worlds. Opportunities to help others can come in a variety of ways and each is important, in its own respect. While microfinancing and charitable programs both have their respective benefits, in certain circumstances one may be more appropriate than the other. Charity should be implemented in times of emergency because it provides short term aid with no strings, prevents banks from capitalizing on tragedy and provides massive aid, whereas microfinancing loans should be utilized so that individual borrowers experience long term assistance and so that jobs can be created in impoverished areas.

As of July this year, $880 million dollars have been lent through Kiva, a popular crowdfunding website for micro-finance loans, since its founding in 2005. That same year, the United Nations Economic and Social Council declared 2005 the “Year of Microcredit” to emphasize the importance of providing financial services to the world’s poorest in an attempt to lift them out of poverty. The idea is simple: instead of donating to charities that provide some services to people in poverty, micro-credit organizations could just lend poor people the money they need to start or expand their own enterprises and then they will both lift themselves out of poverty with the growth of their business and repay the loan with some interest. These micro-credit institutions thus have the goal of simultaneously achieving financial sustainability, a positive social impact, and significant scale to lower costs. Micro-finance expands on the idea of micro-credit to include other useful financial services such as savings, money transfers, business education or insurance, depending on the institution. While the intentions of these institutions were undoubtedly good when they were founded, not all have maintained practices that have an actual, measurable, impact on poverty reduction. Micro-finance has the capacity to be a successful means of poverty reduction, but we need to look further into the actual practices and assessments of these institutions to make the millions of dollars being put into them

Although microfinance helps in combating poverty in developing countries, there is a side-effect of the implementation of MFIs in them. These are non-income or social impacts on the consumers.

“Microfinance is the provision of financial services to low-income clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services.”

Microfinance institutions are playing an important role in the delivery of financial services to the poor. Increasingly, these MFIs are for-profit, limited liability companies, the ownership of which is in the hands of multiple shareholders. In most cases, shares are privately held (i.e., not publicly traded). Most such MFIs are licensed financial institutions finance companies and banks. Many are deposit takers. The microfinance industry has directed to change all that by building a financial market to meet diverse financial needs of under-served people (Armendáriz de Aghion and Morduch, 2004; Hermes and Lensink, 2011), and emerged merely with the objective of alleviating poverty, especially in developing countries (Brau, Hiatt, & Woodworth, 2009; Daley-Harris, 2006).

The first Micro financial Institution (MFI) Grameen bank established in 1976 in Bangladesh by Professor Muhammad Younus head of the Rural Economic Program at Chittagong University. The slogan of Grameen bank was “Banking for the poor” The objective of this organization is the poverty reduction as this bank was the first bank which was providing micro credits without any collateral /security. In the last 35 years Grameen banks have achieved some attractive achievements. In 2005 UN celebrated Year