Significance of Microfinance in Developing Economies - Dissertation Example

This present paper will examine the scope of success of microfinance units in Saudi Arabia through an examination of the profitability and efficiency of operations of these financial units in the economy. In most cases, it is an inefficient financial system that is found to be the prime reason behind the failure of microfinance units, which is why it is necessary to examine the extent to which the financial system of a nation is capable of bearing such a responsibility, before arriving at any conclusion. This paper will conclude that Saudi Arabian banks are currently in a poor state to make the microfinance movement a success. However, if necessary measures are undertaken, the trend could be reversed.

Microfinance institutions are responsible for boosting the social status of a poorer section of a nation’s population by providing financial assistance. Their prime function, however, is that of microcredit, which involves forwarding loans on a cooperative basis to groups of people so that no single individual is liable. This helps to reduce their burden substantially (Feigenberg, Field & Pande, 2010). Their popularity among the poorer sections of society, which comprise a major part of developing economies, has even spurred normal commercial banks to adopt some of their strategies. Microfinance institutions might be owned by government bodies or non-governmental ones, and they might also be involved in tasks other than forwarding credit to poorer sections of society (Consultative Group to Assist the Poor, 2011).

The concept of microfinance has spread across the globe from a small region in Bangladesh where Muhammad Yunus, an economics professor at the University of Chittagong, advanced nearly $30 to a group of poor villagers. An important term of this loan was that the entire group as a whole stood liable for the debt so that the burden was divided equally among the individuals in the group. The initial loan helped the villagers to generate a continual flow of future income and, eventually, sustain their respective households. When Yunus noted the importance of such loans advanced on cooperative terms, he decided to popularise the concept across Bangladesh. Such a measure was understood as an important stepping stone towards poverty eradication. Yunus initiated the construction of Grameen Bank in 1983, which was aimed at advancing loans with social conditions to improve a lot of impoverished people. Bangladesh’s success was highly regarded worldwide and Yunus, who pioneered the movement, was eventually acknowledged with the Nobel Prize for Peace in 2006. The popularity of the movement was such that it was followed by a rare example of a developed economy imitating the moves of a developing one when the UK Prime Minister Gordon Brown sanctioned a lump sum amount for advancing microfinance credit to various regions in Africa (Perkins, 2008).