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Microfinance Institutions - Essay Example

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Between the 1950s and the 70s, governments and donors used to channel funds to the poor communities for development through rural credit programmes, with most of these funds being subsidised. The results were high loan default rates and high loses that made it impossible to reach the targeted rural poor households (Anyanwu, 2004). In the early 1980s, the history of microfinance institutions gained shape as more of these institutions sprouted in developing countries. The Grameen Bank was among the first pioneers to offer small loans and savings services to clients on a large scale with considerable profit margins. These banks did not have any subsidies, they had highly sustainable businesses and were not commercially funded; they also had a wide outreach in such rural areas (Robinson, 2001). The difference between these institutions and the credit programs rolled by governments in the 50s and 60s was that the new institutions had more emphasis on repayment of credits, charged some interests to cater for the costs of credit delivery and had more attention on customers in the informal sectors (Jegede, kehinde & Ahmed, 2011). In the early 1990s, there was increased growth of MFIs in the number of developed institutions initiated and outreach to more customers. The 90s was the microfinance decade, with attention changing from provision of microcredit to the informal sectors to provision of more services such as savings and pensions that the poor demanded, and which led to the name microfinance institutions (Jegede, kehinde & Ahmed, 2011). Doubts on their effectiveness Though microfinance institutions were believed to benefit the poor, there are ranging debates on the effectiveness of such institutions, with major doubts on their effectiveness in eradicating poverty among rural communities. Hulme & Mosley (1996) in a study on the effectiveness of microfinance institutions observed that the poor households in most cases do not benefit from these institutions (those below the poverty line). The institutions usually benefit those way above the poverty line, defeating the purpose of microfinance institutions in poverty reduction. Most poor individuals according to this study but with significant starting incomes, when given such microcredits had much less growth in incomes obtained compared to the groups that did not receive the microcredits. In other words, the study indicated that credit is not the only factor to be considered in income generation, but other factors such as entrepreneurial skills have to be considered. Karnani (2007) further concurs that most people do not have the skills, visions, creativity and the persistence necessary in entrepreneurship. According to Karnani, in more developed countries, over 90% of people with incomes are in employed labour and not in entrepreneurship. This suggests that it is a simplistic assumption to offer credit facilities to the poor to start successful businesses. Moreover Pollin (2007) asserts that small business run by the poor cannot be successful by the mere fact that they have more opportunities to obtain such credit to initiate them. There are other factors that are pertinent and which are addressed in microcredit provision in poor areas. These include roads, affordable transport to move produce and market support to identify and target customers, which is mostly ignored in such efforts (Pollin, 2007). Daley-Harris (2007) on the same note remarked that microfinance cannot be the solution to global poverty levels, and neither can education, economic growth or proper educational facilities. In other words, it is not possible to use a single intervention to address poverty across the ...Show more


Microfinance institutions are relatively new developments in finance that emerged around the 1970s.Microfinance was an improvement of how donors and governments used to channel funds to the grassroots to help the poor in development projects…
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Microfinance Institutions essay example
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