Does Microfinance Effect a Poverty Reduction - Essay Example

Microfinance has a Poverty Reduction and Gender Impact Introduction According to World Bank, 16 of the world’s population lives on less than one dollar in a day. This corresponds to absolute or monetary poverty. 57.6% of the world’s population lives on less than 2.5 dollars in a day. Furthermore, according to statistics by Microcredit Summit that was held in 2010, 70% of the people living on less than a dollar in a day are women (Copestake, Bhalotra & Johnson 2001). Beside women representing the major part of poor people in this society, they are the most vulnerable when compared to their men counterparts. Poverty is a harsh and undesirable phenomenon that needs to be eradicated by all means. The governments across the world have been instrumental in alleviating poverty. They have introduced various measures that are aimed at enabling people to create employment. However, there are other challenges that are dragging the success of these interventions. This paper will analyze the merit of claim that microfinance has a poverty reduction and gender impact (Wright-Revolledo, Greeley, Brody, & Copestake 2005). Problem Analysis Over the past five decades, the financial institutions have become very critical in financing people to initiate various projects that are very significant in alleviating poverty. However, majority of the people in developing countries do not have collaterals to enable them to get access these funds (Shaw 2004). For instance, in Asia and Africa, many governments are yet to establish effective structures to enable people to have the required collaterals in order to get access to loans. This has made it hard for the banks and other financial institutions to reach the common citizen who is highly affected by the poverty levels. Agriculture is one of the sectors that are associated with poor people in these regions (Hamzé 2001). Many poor farmers rely on rain fed agriculture in order to grow their food. This is because they do not have collaterals such as title deeds to enable them get access to the funds. In addition, banks are not willing to give them loans because the sector is vulnerable especially from the vagaries of nature such as drought, floods, etc. This has exposed these people to extreme poverty. However, microfinance institutions are able to offer poor people with loans that enable them to start small and medium enterprises, an aspect that has contributed immensely in reducing the poverty levels. Because majority of these people lacks the skills and experience on how to handle such enterprises, the microfinance institutions have even gone ahead to train the people how to handle money and save in order to improve their welfare. In addition, these institutions do not require collaterals such as title deeds for them to offer the poor people with loans. Instead, they have developed flexible mechanism that fits the interests of the people. In an example, they request these poor people especially in rural areas to form groups and start common projects (Ledgerwood & White 2006). They then fund these groups and train them on financial management skills. Therefore, unlike banks, microfinance uses social collaterals to offer loans to poor people. This has contributed immensely in reducing the levels of poverty among thousands of people across the world. Initially, many non-governmental organizations were giving aid to highly vulnerable people in the society. With time, these organizations realized that the aid was not having a major impact on the lives of the people. As a result, there was a need to tackle the challenge using a new dimension. However, corruption by the government officials has been hampering the effort by these institutions to eradicate poverty (Basile & Mukhopadhyay 2009). Nevertheless, the entry of microfinance has changed the strategy to reduce poverty levels in these societies. These microfinance institutions have been hailed for coming up with the best model to eradicate poverty in the society (Alemu 2009). Literature Review Majority of the financial institutions are located in urban areas. Many of the developing countries across the world have not developed effective structures required to support the operations of these institutions in rural areas. For instance, there is no electricity in majority of the rural areas. In addition, poor road networks make it hard for such services to reach the rural areas. However, statistics indicate that the largest number of poor people reside in rural areas. These are people who live within one dollar in a day (Edegbe 2014). As a result, these people cannot be able to get access to finance because they have no security or a decent salary to enable them to repay the loans. However, microfinance has gone a notch higher to enable the poor get access to credit. For instance, they body that offer the loans accepts goods such as agricultural products in return for loans. They later look for buyers of these products and repay themselves (Khandker 2005). Moreover, they use existing structures or local community heads to assess the financial position of the person and whether given time and space, the person can be able to repay the loan. This has made it possible for many small-scale farmers and business people to get access to loans, thereby, increasing the stock or purchasing the modern production machineries which have enabled them to increase the cost of production. This has played a significant role in alleviating poverty in the world. Using microfinance programs to give women access to financial services plays a significant role in mobilizing their productive capacities which are important for their economic development (Wohlmuth 2009). In addition, women’s public status which is mainly precarious is affected by their private status because they have multiple responsibilities. Reports in developing countries indicates that majority of the men in these countries have moved to urban areas in search for employment. However, women are left behind to take care of the children. Nevertheless, they are not employed and they lack the necessary skills. As a result, they are left with a burden of supporting their children. However, microfinance institutions closes this gap by giving these women loans to educate their children and instead of paying in cash, they can use farm produce or any other products to repay the loans slowly without inserting excess pressure on them (Nayak 2014). This model has been successful in enabling many women either widowed or divorced to support themselves and their children, an aspect that has reduced the poverty levels significantly. Many women are faced with cultural, legal, economic, education constraints, an aspect that hinder them from participating in mainstream economic activities. Therefore, they have difficulties in accessing conventional banking systems (Lensink 2011). Furthermore, they are not able to secure productive employment opportunities. This leads to income disparity which is one of the salient reasons that has brought mass poverty among the women in the society. On the other hand, microfinance institutions do not use these as parameters to decide whether they will give their clients with loans. Instead, they focus mainly on helping people who are mainly rejected by other financial institutions (Feinstein, Picciotto & World Bank 2000). This is through enabling them to get access to a platform where they can meet with other people whom they share the same predicament. This enables them to discuss and encourage each other. In addition, this strategy enables these clients to share ideas and way forward in order to improve their economic conditions. Grouping these clients make it possible for the microfinance institution to look for experts to train these members in order to enable them enhances their productivity levels. This is unlike other financial institutions which are mainly focused towards making profits. They expect that the customers will look for technical knowhow on how to improve their levels of productivity. However, majority of the poor people in the society are illiterate (Kabeer 2005). In extreme cases, they don’t know how to read and write. Therefore, they are not aware on the channels to use in order to get help. Nevertheless, microfinance institutions have integrated this information into their systems. As a result, they have ensured that they mainly provide technical skills which do not require intensive reading. This is to make it easy for the clients to understand and implement (Alemu 2009). The number of graduates who are being released from the institutions of higher learning is increasing tremendously. However, it has become very hard for this generation to secure a job. Therefore, majority of them are turning towards drugs as a way of reducing their frustrations after spending much of their time learning only to fail to achieve their goals. These are people who cannot get access to loans because they lack assets that can be used as collaterals (Barrett 2005). However, microfinance institutions provide these young people with loans, thereby enabling them to start business and create employment. This plays an important role in reducing poverty levels which emanates from lack of employment opportunities. Many of the people living under a dollar a day live in rural areas. Due to high poverty levels and illiteracy many financial institutions opts to set their base in the urban centers. However, microfinance institutions prefer to work with rural people because they are willing to follow the model set by these institutions in order to improve their living conditions. As a result, microfinance institutions have played a significant role in distributing resources in rural areas and enabling the people to get access to funds, an aspect that has played a significant role in enabling this group of people to start money-making enterprises. Microfinance institutions have developed a range of services that addresses the requirements of the poor in the society. Besides helping the poor through redistribution of income, microfinance institutions have played a significant role in the national growth. This has been significant in improving the living standards of the people. Therefore, the national government is able to support the citizens and offer them with employment. This has played a critical role in eradicating poverty. Microfinance programs provides women with a special priority because through enabling the, to access monetary and educational funds, they help in mobilizing female productive practices, an aspect that plays a critical role in reducing poverty levels and maximizing economic output. According to World Bank, there is a strong correlation between women empowerment and development on one hand and the Index of Human Development on the other. The report by this institution indicates that women have been marginalized in many institutions because they lack financial power. As a result, a lot of women have even turned to prostitutions in order to cater for their family needs. However, the microfinance programs have brought them together and offered them with training which has been significant in enabling them to earn a descent living. This has contributed immensely towards enlightening women and giving them a platform to make their money and manage their activities (Robb 2002). This has empowered women and the whole society, thereby, reducing the cases of gender inequality which results from unequal distribution of the resources. According to Weiss & Montgomery (2005), women are more inclined to be altruistic and they mainly use their money to improve the status of their families. Therefore, targeting women through financial support plays a significant role in uplifting the living standards of the society at large. According to Special Unit of Microfinance report, women’s success is a benefit to more than one person. Their income is important in terms of their children’s education, nutrition, medical services, and other household goods such as clothing. The report indicates that women’s credit repayment rates are higher compared to their men counterparts. This enables the microfinance institutions to use the money to lift the living standards of other people in the society. This is unlike banks and other financial institutions which use profit gains to set a barrier of entry for other investors in the market (Weiss & Montgomery 2005). The model by the microfinance institutions has enabled many vulnerable people in the society to gain ground in the investment arena. This has promoted equality and a healthy living among the residents. Granting of loans to women by the microfinance institutions has made them to become income generating actors and become financially independent. This strategy modifies the available choice parameters and expands their areas of action. Therefore, women gains more power to make critical decisions that relates to their welfare. According to Todaro & Smith (2006), many women have been battered by their men because they lack financial power and they highly depend on them for their existence. The reports states that women who participates in bringing up their families are independent and are unlikely to face similar treatment. As a result, providing financial assistance and training to women plays a critical role in improving their self-confidence. In addition, these women start making important decisions such as family scheduling, schooling, and other marital issues. The number of children is associated with poverty. Initially, men made decisions on the number of children women are to give birth. Furthermore, due to illiteracy levels, women were not aware on the need to use family planning methods in order to regulate the number of children (Todaro & Smith 2006). However, through training offered by microfinance institutions, women have become aware on the importance of planning their families. This has enabled them to give birth to the number of children that they can be able to support and offer them with a descent life. This has played an important role in reducing the poverty levels especially in the rural areas. Poverty plays a major role in creating a vicious cycle. In order to fight it, monetary and social resources should be provided to the group affected. In the society, there are symbolic hierarchy between men and women. This hierarchy leads to alpha-male values that marginalize women. Gender differences can be used to constrain other people’s opportunities. In many traditional societies, there is a sexual division of activities which disadvantaged women. This has a major role in making it hard for them to get access to material and social resources. In order to reduce these inequalities, it’s significant to support women financially (Heshmati, Maasoumi & Wan 2015). Microfinance programs reduce the gaps by providing the necessary support to women and other marginalized groups such as the young people. This plays a significant role in reducing poverty levels in the society. Financial institutions are there to make profits from interests accrued from loans. However, many microfinance institutions aim at improving the lives of the people. A lot of study has been conducted on factors that increase the poverty rates in the society (Basile & Mukhopadhyay 2009). These institutions use these reports to ensure that the issues that have been mentioned are addressed. For instance, many people do not have the capacity to repay the loans due to high interest rates being charged by banks. In order to address this issue, the microfinance institutions encourages people to form social groups and raise a particular amount of money which will be saved and used to get access to loans. This has enabled the youth and women to get loans more easily and start projects that uplift their lives (Alemu 2009). This has been instrumental in reducing poverty levels in the society. Women make more successful microfinance customers because they utilize the opportunity provided by these institutions to improve their welfare. Many of the women across the world have lacked the necessary documentation to get loans. In many cases, family assets are registered using the man’s name. As a result, women are left on the mercies of their husband. In some cases, men take loans and fail to repay on time, forcing the banks to confiscate family property, an aspect that exposes women and children to abject poverty. In other cases, women have been left without any assets after the death of their husbands (Hamzé & United Nations (New York) 2004). As a result, microfinance institutions create an opportunity for women to realize their dreams. In addition, they provide women with a chance to explore different choices in order to maximize their potential. This explains the reason why majority of successful microfinance customers are women. According to statistics by the World Bank, among the 81 million poor clients that were served by different microfinance programs, 84% were women. This is an indication that women form a very large segment of the poor people in the society. Therefore, the success of the microfinance program in empowering women can be attributed by the simple procedures used to get access to finances. In many rural areas in developing countries, women have formed social groups that they use to help each other in times of needs. The microfinance institutions use these groups to fund the women and educate them on the need to save for the future of their children (Armendariz & Morduch 2007). With many of these women being involved in subsistent farming, the entry of these programs have acted as a great relieve to these institutions as women are now able to purchase the latest technologies to enable them to boost their income. Initially, government was the major employer in different countries. However, in the past decades, many governments have shifted from being employers to a body that creates a serene environment. This is to attract investors towards their countries who will in turn offer employment to the citizens. However, this move has benefited those who are literate. Many of the illiterate people have been left unguarded with no policies to enable them learn technical skills which can enable them to earn an income. Therefore, introduction of microfinance program in these countries has closed the gap that was left. This is because these programs have shifted their attention to this group of people (Alemu 2009). These are people who are willing to participate actively in different activities to raise enough money to support their families. This situation was even worsened by the fact that in some traditions, educating a girl child is viewed as a waste of money. Therefore, a girl child is left behind to cater for the younger siblings. Nevertheless, with the increasing levels of globalization, information is starting to reach in these areas on the importance of educating all the children. In addition, intensive campaigns by the governments and non-government organizations are changing these notions. However, these groups are not putting the necessary mechanisms to help those who were affected by these perceptions, some of whom became mothers at very tender age (Alemu 2009). Therefore, the entry of the microfinance institutions has given a lifeline to these marginalized groups through enabling them to support their children who later uplift the lives of their families and the rest of the society. Besides offering financial support, microfinance institutions have been instrumental in setting up the necessary infrastructures to enable people to get access to better services (Hamzé 2001). Many of the microfinance institutions have been involved building schools and health institutions. In Africa, Asia, and Latin America, people who live below the poverty line have been unable to overcome poverty because they lack supporting facilities. Through funding marginalized groups, these institutions are able to bring them together and mobilize their resources towards establishing these important facilities. This has played an important role in improving the health and education standards (Bateman 2011). These are some of the aspects that have contributed to increasing the levels of poverty levels in these areas. Moreover, the institutions have invested heavily on educating these groups on modern farming and entrepreneurial techniques, thereby, making it possible for the groups to be financially stable. Conclusion The success of microfinance institutions towards alleviating poverty can be traced to their model which targets the group that is highly affected by the poverty. Many of the banks have been ignoring these groups because they do not have the necessary documents to secure loans. Although banks have been participating in corporate social responsibility, these efforts have only been associated with building their reputation in the market rather than helping the most vulnerable groups in the society. However, microfinance programs have been able to offer an opportunity to the women and other vulnerable groups such as youth because they mainly use social collaterals to offer them with low-interest loans. In addition, they have been able to address issues related to illiteracy and cultural perceptions, an aspect that has enabled them to be of great success to the society. References Alemu, B. A. 2009. Microfinance and poverty reduction: The case of ACSI in Enemay district, East Gojjam. Saarbrücken: VDM Verlag Dr. Müller. Armendariz, B., & Morduch, J. 2007. The economics of microfinance. Cambridge, MA: MIT. Barrett, C. B. 2005. Institutional arrangements for rural poverty reduction and resource conservation. Basile, E., & Mukhopadhyay, I. 2009. The Changing Identity of Rural India: A Sociohistoric Analysis. Anthem Press India. Bateman, M. 2011. Confronting microfinance: Undermining sustainable development. Sterling, VA: Kumarian Press. Copestake, J., Bhalotra, S., & Johnson, S. 2001. Assessing the Impact of Microcredit: A Zambian Case Study. Journal of Development Studies, 37(4), 81-100. Copestake, J., Dawson, P., Fanning, J., McKay, A., & Wright-Revolledo, K. 2005. Monitoring the Diversity of the Poverty Outreach and Impact of Microfinance: A Comparison of Methods Using Data from Peru. Development Policy Review, 23(6), 708-723. Edegbe, U. B. 2014. Microfinance and poverty reduction in Nigeria: A study of selected microfinance Institutions in Benin Metropolis South-South of Nigeria. Feinstein, O. N., Picciotto, R., & World Bank. 2000. Evaluation and Poverty Reduction: Proceedings from a World Bank Conference. Washington, DC: World Bank. Hamzé, I. A. 2001. The role of microcredit in poverty alleviation: Profile of the microcredit sector in Lebanon. New York: United Nations. Hamzé, I. A., & United Nations (New York). 2004. The role of microcredit in poverty alleviation: profile of the microcredit sector in Lebanon. New York: United Nations. Heshmati, A., In Maasoumi, E., & In Wan, G. 2015. Poverty reduction policies and practices in developing Asia. Kabeer, N. 2005. Gender equality and womens empowerment: A critical analysis of the third millennium development goal 1. Gender & Development, 13(1), 13-24. Khandker, S. R. 2005. Microfinance and Poverty: Evidence Using Panel Data from Bangladesh. World Bank Economic Review, 19(2263-287). Ledgerwood, J., & White, V. 2006. Transforming Microfinance Institutions: Providing Full Financial Services to the Poor. Washington, DC: World Bank. Lensink, R. (2011). Microfinance: Its Impact, Outreach, and Sustainability. World Development, 39(6), 875-881. Nayak, B. B. 2014. The Synergy of Microfinance: Fighting Poverty by Moving beyond Credit. New Delhi: SAGE Publications. Robb, C. M. 2002. Can the poor influence policy?: Participatory poverty assessments in the developing world. Shaw, J. 2004. Microenterprise Occupation and Poverty Reduction in Microfinance Programs: Evidence from Sri Lanka. World Development, 32(7), 1247-1264. Todaro, M. P., & Smith, S. C. 2006. Economic development. Boston: Pearson Addison Wesley. United Nations. 2006. Microfinance for poverty reduction: Building inclusive financial sectors in Asia and the Pacific. New York: United Nations, ESCAP. Wainyaragania, K. 2012. Microfinance: An Instrument for Poverty Alleviation ; Empirical Analysis. Saarbrücken: LAP LAMBERT Academic Publishing. Weiss, J., & Montgomery, H. 2005. Great Expectations: Microfinance and Poverty Reduction in Asia and Latin America. Oxford Development Studies, 33(3-4), 391-416. Wohlmuth, K. 2009. New growth and poverty alleviation strategies for Africa. Münster: Lit. Wright-Revolledo, K., Greeley, M., Brody, A., & Copestake, J. G. 2005. Money with a mission: Volume 1. London: ITDG. Read More