Microfinance - Global Development

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“Dealing with Hunger through Marginal Means”

When dealing with the issue of world hunger, numerous factors need to be considered, like infrastructure issues, education, food storage, food accessibility, and allocation to provide underprivileged people with some stability in their lives and bring them out of their poverty. All the above factors can be accounted for through economic sustainability, the ability through which they can pay for all their basic needs and still save some profits independently using local resources. Thus, by making them independent and promoting them to make profits will help many needy people cross the poverty line. According to Khavul, S. (2010), 2.8 billion people are living on less than 2 USD a day, and promoting economic sustainability, the disparity between wealthy and these poor will shrink, thus increasing the country’s GDP and purchasing power.

 

The above figure shows that in 2005, most of the three billion people that earning less than $2 a day are predominantly living in Asia and Africa. Although the factors contributing to this may be several folds, the inability to attain the funds to drive innovation and foster local businesses play a huge role in the demise of the economic potential of these areas.

A Solution: Microfinance Institutions

Microfinance Finance Institutions in developing regions like Africa and Asia can increase the flow of capital to poor people by providing them micro-loans to create social value. By alleviating poverty through lending micro-funds, or helping them by establishing education institutions, or giving staple crops, and other agricultural ventures. 

What are Microfinance Institutions?

A Microfinance institution provides microloans that often extend from as little as $100 to as respectable as $25,000 without any collateral. Numerous banks offer extra services, for example, checking and savings accounts as well as micro-insurance products, and some even give financial and business education. The objective of microfinance is to offer needful individuals a chance to become self-sufficient.

A microfinance institution, unlike traditional financial institutions that look to invest where the customers are trustworthy, finance a new and poor customer with no credit score or without any commercial background.

These institutions use group-based financing instead of a single individual to lower their risk. In this approach, a credit is given to a group of people instead of to a single individual.

Benefits of Microfinance

  • It allows people to better provide for their families
  • It gives people access to credit
  • It offers a better overall loan repayment rate than traditional banking products
  • It creates the possibility of future investments
  • It can create real jobs
  • It offers significant economic gains even if income levels remain the same

The risk involved in Microfinance

  • There is no technical infrastructure to gauge the creditworthiness of the customers
  • Lack of adequate physical infrastructure, the administrative costs of maintaining transaction and reaching to clients increases tremendously

Regional breakdown access to microfinance Services

According to the International Finance Corporation, since the microfinance industry started, more than 130 million have been helped. Still, despite its ever-growing reach, the microfinance industry may have only maintained about 20% of the potential market.

The information is based on 2005 data

Although numerous MFI’s have helped impoverished people, there are still many who are lacking access to the capital.  The above figure shows that there is a vast difference between the number of most impoverished families and MFI outreach. The chart shows that:

  • In Asia, almost 100 million individuals lack capital
  • In Africa the Middle East, the number is close to 55 million
  • In Latin America Carib, around 10 million lacking access to capital

There are around 170 million impoverished people in just above continents that lack necessities. Lending financial help will improve the social-economy conditions as well as the purchasing power of these countries.

Distribution of in the various sector

All microfinance institutions do not have the same goals, few concentrate on providing education, some assist entrepreneurship, some promote women empowerment, and some focus on the agriculture sector.

The above graph shows that many low-income families in the food processing and retail sector are approaching the microfinance institutions. In contrast, only 5.9% in the service sector have access to this microfinance sector. It shows that the potential of this industry and tells us that there are many sectors which can benefit from MFIs.

Who benefits from microfinance?

In a 2005 article, “Microfinance and Poverty: Evidence Using Panel Data from Bangladesh” Khandker did a study in which 1,638 households participated in a microcredit program between 1991/92 and 1998/99. He determined that moderate poverty (measured as individuals who live off between 1,739 and 2,112 calories per day) declined 17% over that time while extreme poverty (individuals who live off less than 1,739 calories per day) decreased by 12%. 

Many people living in developing countries are trapped in an endless cycle of poverty, living on very less income, deprived of regular work, and access to necessities. To promote economic sustainability, some large organizations work closely with the World Bank and, while other smaller groups operate in different nations.

The above graph above shows that the GDP of most countries have shown promise and a large portion of this growth can be attributed to MFIs especially in the nations of Peru, Cambodia, India, Armenia, Kenya, Kazakhstan, Kyrgyzstan, Paraguay, Russia, Ghana, Bosnia Herzegovina.

Over a period of merely two years, we have seen an average increase in GDP by 0.4% across microfinance markets, so we can be hopeful that with the tread of MFIs picking up we could see a substantial increase in this number in the following years.

Through the microfinance market, investors can also make profits along with solving poverty in countries around the world.

 

In most of the countries, MFI’s have made profits. The return of assets of microfinance institution located in Switzerland, Romania, Spain, UK, Poland, Germany, Bulgaria, Macedonia, Bosnia Herzegovina is positive, concluding that we have a win-win situation for both the debtors and the institutions.

Commercialization of microfinance has allowed MFIs to operate more efficiently, grow in different countries and sectors. It attracts profit-seeking investors, which generates more capital, and by becoming a profitable business, a microfinance bank can extend its reach, providing more money and more loans to low-income applicants.

 

Dexia is a commercial bank which in 1998, allocated some of its funds called Dexia Micro-credit fund for micro-loans. The value of this fund increased from 10 million dollars to 45 million dollars in just five years.

Dexia Micro-credit fund is an example of commercialization, which shows the excellent potential of profit for investors in the microfinance market.

 Scope of Microfinance

The microfinance sector is growing, and its scope is bright in the future. According to Reuters, in total, there are about 3,000 microfinance institutions that are currently operating around the world today. About 400 of them have active lending programs.

Despite many MFI’s in the world, there are around 80% of poor people have no access to loans of this scale. Records show that there are more than 5 million people that could start a business today to generate income if they had access to start-up funding through a small loan. (Planet Finance Japan). Also, more than 200 million small businesses may lack access to adequate financing, a basic savings account, and other financial resources. (Association of Microfinance)

These numbers suggest that if we can formalize this sector, this market can truly flourish. With the help of commercialization, this market attracts more investors and thus will be able to reach more low-income people. 

Summary

The microfinance model serves an integral part in solving a myriad of problems such as world hunger through promoting economic sustainability and alleviating poverty in developing counties. There must be an extensive and exhaustive research committee that involves financial, innovation, social change, finance to help the microfinance sector to continue growing in the years and decades to come.

Also, this sector needs to attract more investors. MFI's must convince investors they are professionally governed, efficiently managed, and staffed with high talents.

Another thing that needs attention going forward is the interest rate of being charged to lenders (APR). APR in few countries is very high, and with commercialization, this sector is leaning towards boosting profits rather than focusing on a social mission. A regulatory body should monitor APR like the World Bank or respective country government institutions. Also, both people and investors need to be kept in mind while deciding the APR. There should be a balance between profit and social cause. 

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