CHAPTER FOUR: THEORETICAL BACKGROUND
4.0 INTRODUCTION
This chapter starts by explaining the meaning of key concepts, followed by the main theories used in this study to explain the determinants of financial sustainability of microfinance institutions in Nigeria. A theoretical framework is then developed based on the accounting theory and theoretical background presented as reviewed from available literature in microfinance.
4.1 CONCEPT OF MICROFINANCE
Microfinance is the provision of small scale financial services to low income or unbanked people. It is about provision of “a broad range of financial services such as deposits, loans, payments services, money transfers and insurance, to the poor and low-income households and their farm or non-farm micro-enterprises” (Mwenda and Muuka, 2004:145) . This agrees with the Asian Development Bank (ADB) which defines microfinance as the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and their micro-enterprises . From the above definitions, microfinance is more than just provision of small loans also known as microcredit. It is about provision of various small scale financial services. Thus for this study, consistent with the above definitions, we use the term microfinance to mean the provision of small scale loans, savings, deposits, and other financial services to the poor. Institutions that provide these small (micro)
Many families in developing nations do not have sustainability in their lives. In her article, “Microfinance Empowering Female Entrepreneurs”, Elizabeth Matsangou writes, “starting and growing a business is virtually impossible without access to financial services.” Basically, Matsangou is saying that in order to start a business, you need help with the use of micro-loans. Further proving the point that micro-loans that empower women and women need these loans. Many women in developing countries start micro-enterprises to help raise money for their family. With this in mind, it is obvious to see what kind of positive impact micro-loans can have on women. Starting businesses are nearly impossible without the use of micro-loans, proving that they can help empower
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,
Micro credit is the process of helping the “poorest of the poor” obtain loans. Since big time banks rarely help people who need help acquiring loans, micro credit is another source that makes it possible for the lower class to achieve that. They focus on they call the “real economy,” where they are on personal relationships with their clients. They want them to succeed and help their clients change their own life. Compared to the big banks, they are not looking to make huge amount of interest back off their loan (paper chasers).
Microcredit undoubtedly is easily sustainable to the public. For example suppose you had poor credit or no credit at all, you can still receive a lone (The Pros and Cons of Microloans). Because of this anyone can get a small lone. This show that no matter their position, microfinance can help. In addition the program targets under privileged citizens (What are the pros and cons of microfinance?). This shows that microcredit can help people in the toughest situations. As a result people can provide better for themselves and their family. However some claim borrowers can’t make a living because people can’t afford to pay back lones. Lastly microcredit is used all over the
Poverty, hunger, and malnutrition remain rampant across the world today. Countries such as Africa and Asia are struggling with high numbers of poverty and malnutrition, which is causing millions of men, women, and children to face death under the everlasting shadow of poverty. In order to eradicate the darkness of poverty, companies and institutions are taking up different initiatives to help those in poverty stricken countries. One such initiative is known as micro financing, which was created by a Bangladeshi economist, Muhammad Yunus. Micro financing are small loans given to people in poor countries who want to start a business or need some financial assistance. A famous website for micro financing is Kiva.org, which has been lending money to people since 2005 and has witnessed great success in doing so. The website has made the process of lending money to individual extremely simple and it is something that any individual can partake in. For example, If I wanted to lend some money to any of the numerous entrepreneurs on the website than I would first begin by choosing the lend category. After this, the website will list some of the most popular buyers on the right hand side and as of now, Emperatriz De América Group, which is a group of women who want to borrow money to buy fish. The website lets the lenders sort through different types of borrowers based upon how much money they are in need of. The one thing I liked the most about the website is
Despite the growing body of literatures about the microfinance and its impact on poverty, there are counter growing criticisms against microfinance in issues such as reaching the poor, unchanged poverty level, high interest rate, brutality in repayment processes, financial sustainability, and women empowerment. (Hossain, 2010).
The generation of self-employment in non-farm activities requires investment in working capital. However, at low levels of income, the accumulation of such capital may be difficult. Under such circumstances, loans, by increasing family income, can help the poor to accumulate their own capital and invest in employment-generating activities (Hossain, 1988). Commercial banks and other formal institutions fail to cater for the credit needs of smallholders, however, mainly due to their lending terms and conditions. It is generally the rules and regulations of the formal financial institutions that have created the myth that the poor are not bankable, and since they can’t afford the required collateral, they are considered uncreditworthy (Adera, 1995). Hence despite efforts to overcome the widespread lack of financial services, especially among smallholders in developing countries, and the expansion of credit in the rural areas of these countries, the majority still have only limited access to bank services to support their private initiatives (Braverman and Guasch, 1986). In the recent past, there has been an increased tendency to fund credit programmes in the developing countries aimed at small-scale enterprises. In Kenya, despite emphasis on increasing the availability of credit to small and microenterprises (SMEs), access to credit by such enterprises remains one of the major constraints they face. A 1995 survey of small and
In recent months a new concept of micro financing has created intrigue. Micro financing has many definitions but the most popular reference these days is the practice of informal loans between individuals rather than institutions (peer to peer Micro loans). Micro financing first became popular in third world countries where entrepreneurs were able to start businesses for as little as twenty-five dollars. Many were able to quickly repay their loans and often times become grantors of other peoples loans. This created a formula for prosperity though admittedly on a small scale. As micro financing web sites began to pop up for use in more industrialized nations one question became obvious. The maximum request is capped at ten thousand dollars with most micro financing organizations. So what enterprises would actually benefit from the loan? There are not a large number of start up businesses that can be built in the modern world for a mere ten thousand dollars. Most franchise opportunities require well over a twenty-five thousand dollar initial investment. Even legitimate home based businesses are not cheap. Surprisingly entrepreneurs seem to be able to do a lot with limited funds. A little research on one of the more popular micro loan web sites www.kiva.org turned up a large number of people with success stories based on loan amounts far less than the maximum. No one had plans to start up a franchise but there were many people with clear and realistic goals. A large number of
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.
The problem with the current state of micro-banks and credit card companies is the amount of the fees and interest charges they are charging, usually to consumers who are poor and low wage earners, who desperately seek out these alternatives to take care of their financial needs. These practices leave them in a more desperate state because the extortionate fees, making it impossible to stay current on their payments, by driving disadvantage consumers in deeper debt. Some of these companies charge high percentage rates, and being late on
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.
The proposed research has intent to develop new research model for behavioral finance through ethnography by considering social relationships as an economic resource for the financial participants in microfinance. The proposed research envisage with psychological and sociological variables of microfinance beneficiaries.
In reality, it is generally perceived that small scale fund plans have met constrained triumphs. The capacity of a lady to change her life through access to money related administrations relies on upon her individual circumstance, capacities, environment and the status of ladies as a gathering. Control of capital is one and only measurement of an intricate procedure of strengthening. Tragically, advantages of smaller scale credit are undermined by inconveniences confronted by ladies in getting to data, informal communities, and different assets they have to prevail in business. An investigation of the effect of miniaturized scale credit plots in Bangledesh uncovered consequences of just 21% of respondents getting to be enabled. Out of financial variables investigated, they inferred that ladies institutional cooperation, media presentation and family arrive property were the more critical necessities for ladies strengthening than accessibility of credit. A few faultfinders have contended that the greater part of microfinance projects are organized so as to have their most noteworthy effect in helping ladies perform conventional parts better. They contend that by accentuating the advantages that ladies' families get from their entrance to credit and ensuring this does not meddle altogether with their customary obligations, microfinance foundations may strengthen conventional sex parts as opposed to change
While the spread of microcredit as a development practice has enabled borrowers in many developing countries to access credit, not all experiences with microcredit have been positive. The original model of microcredit lending was not effective in alleviating poverty. To remedy this, an “improved” lending model was introduced; however, this model, too, has failed the impoverished citizens of the developing world because of its exclusivity. Traditional microcredit loaning systems require some form of material collateral to ensure that a borrower will repay their loan. This excludes the ultra-poor due to their lack of possessions to use as collateral (Schurmann and Johnston 2009, 521). To solve this issue and provide the poorest citizens with
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