Impact of Micro-Finance on Economic Development Essay

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In both developing and emerging economies, microfinance has vastly and increasingly been seen as one of the most important means for enhancing the lives of the poor and therefore a major tool for economic and social development mostly in rural areas. Lately, contrary to this widespread belief, critics have raised eyebrows against this growing popularity of microfinance as a major tool for enhancing economic development. Contrary to belief, they are of the opinion that microfinance is a ‘make-belief’ that is hindering economic and social development rather than enhancing it.
It is to this regard and in light of these growing controversies therefore, that this essay intends to take a critical look at the context “microfinance”
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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.
Another major characteristic of microfinance is that they have numerous loans to informally-organised businesses which are often in small amounts over a short-term period with turnover of the aggregate loan portfolio maturing several times during the year. These are unsecure loans with simple repayment structure and documentation, but interest rates are generally higher than those in the formal sector (Anderson, 2002).
Another distinctive feature of MFIs is their innovative means and ways of reaching out to the undeserved and poorest clients using several methods and mixing unorthodox techniques such as group
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