This is not actually micro or macro the class is called Economics of developing countries - Essay Example

ECONOMICS OF DEVELOPING COUNTRIES Microfinance refers to financial services that are rendered to low income earners or toward individuals that have minimal access to banking services. The services offered are in the form of loans and savings. The principle behind microfinance is that low income earning individuals are able to uplift themselves from poverty when financial services have been made accessible to them. Despite this, microfinance does not necessarily lead to poverty alleviation since it has its limitations in some quarters.

However, numerous studies have concluded that micro-finance has solved the problem of poverty in many developing countries. This is because, poor people around the world seldom access financial services through the formal sector, and hence, they are forced to venture into informal financial dealings which are in the form of micro-finance services (Gulli 50).The history of Micro-finance dates back to hundreds of years. Credit corporations and lending unions have been in existence for many centuries.

However, the pioneer of modern micro-finance is Dr. Mohammad Yunus, who in the 1970s started experimenting with the idea by using women in rural villages of Bangladesh. Yunus began lending affordable loans to the women, and they would later return at an interest. The women benefited from the loans because they were able to begin community projects that generated income for them. The profits enabled them to pay back the loans. Later in 1983, Yunus founded Grameen Bank, one of the world’s greatest micro-finance banks currently.

Yunus won the Nobel Peace Prize in 2006 due to his efforts of improving the lives of poor women in Bangladesh. Innovation in micro-finance has continued over the years, and currently, it has been established that micro-finance solves economic problems of people in developing countries. Current estimates by the World Bank reveal that approximately 160 million people that live in developing countries benefit from micro-finance (Armendariz 67).Does Microfinance work? Limitations and positivesComprehensive studies have demonstrated that micro-finance indeed works.

Research has shown that micro-finance continues to assist poor individuals in developing countries to meet basic requirements, and protects them from any potential risks. These financial services have enabled low income earners to improve their quality of life and enhance their enterprise stability. Most Micro-finance Institutions (MFIs) target women, for example, Grameen Bank targets Bangladeshi poor women. This is of benefit as it contributes to women empowerment, and ensures that women in developing countries have equal opportunities as men in life.

This enhances gender equality, and further improves household well-being (Gulli 58).Furthermore, with access to micro-finance, poor people are able to cope up with sudden enhanced expenses that may come as a result of natural calamities and loss of business assets. This is because, access to micro-finance loans enables people to be more resilient to challenges that emerge in day to day activities. Empirical studies reveal that micro-finance has indeed assisted people in developing countries. In Bangladesh, studies reveal that incomes of members of Grameen Bank are higher by 43% as compared to those who do not take micro-finance loans in poor villages.

In El Salvador, the incomes of FINCA clients that take part in micro-finance were estimated to increase by 145% in 2010. In Indonesia, 90% of borrowers from the Band Rakyat Indonesia graduate out of poverty every year. This statistics reveal that, indeed, micro-finance solves the problem of poverty in most developing countries. The major limitation is that micro-finance measures take a longer time for the effects to be realized, hence, it is a long term venture that cannot alleviate poverty on a short-term basis.

Another limitation is that, micro-finance is inapplicable in situations whereby there are marked challenges to loan repayment. For example, areas that have a high incidence of disease and natural calamities are unsuitable for MFIs. This is because; microfinance is effective when clients are able to repay the loans under the stipulated terms (Gulli 76).Microfinance in IndiaThe microfinance industry in India continues to grow year by year. A recent study by Intellecap reveals that 60 MFIs have about 10 million clients.

The loans by these institutions are aimed at ensuring that impoverished women in India are empowered and are able to start their own businesses so that long-term financial independence is achieved. Most of these women live with less than 1 US dollar daily; hence, micro-finance has enabled them to enhance their earnings.Works CitedBeatriz Armendáriz, Marc Labie. The Handbook of Microfinance. New York: World Scientific, 2008.Hege Gulli, Inter-American Development Bank. Sustainable Development Dept.

Microenterprise Unit. Microfinance and poverty: questioning the conventional wisdom. New York: IDB, 2009.