Microfinance Development Projects in Africa and South Asia - Essay Example

Microfinance Development Projects in Africa and South Asia Introduction Technically, microfinance development entails provision of small financial services to business enterprises and other income generating activities. In practical contexts, examples of small financial services involved in microfinance developments include but not limited to, provision of micro-credits, provision of small operational leases on assets, and provision of micro-insurance. Supposedly, these microfinance development services provide improvement avenues for medium and small-scale enterprises, especially in developing nations of Africa and South Asia (Bhatt and Yang 320). Currently, microfinance developments are perceived as being the best vehicles towards economic development in developing nations of Africa and Asia. Undeniably, these small scale financial approaches are instrumental in poverty reduction within economically weak communities. However, the effectiveness of microfinance development in Africa and South Asia is often overestimated. Despite being a practical alternative towards social and economic developments in poverty-stricken societies, effectiveness of microfinance approaches are riddled with technical weaknesses which include but not limited to poor coaching, shallow monitoring programs, and limited consultancy services (Hal and Shams 21). Basically, small-scale microfinance developments provide direct resources that fuel developments on economic fronts within developing communities in Africa and South Asia. However, microfinance approaches do not independently foster development. Besides creating a favorable environment for improvement, developmental importance of small-scale microfinance developments is dwarfed by other influential factors like government stability, low crime rates, and favorability of commercial environments in developing nations. First Argument Admittedly, microfinance development services have provided a myriad of economic benefits to medium and small scale enterprises in developing nations of Africa and South Asia. For example, entrepreneurial projects in poor communities of Northern Nigeria have been elevated by approximately 12% annually, since 2005 (Smith 52). Based on a research by USAID, microfinance services have strengthened small and medium enterprises in Northern Nigeria. In partnership with private microfinance service providers, the Nigerian government has eased accessibility of micro-insurance, micro-credit, and micro-lease services to members of poor communities. For example, governmental organizations and private banks have provided group loans to women associations in most Nigerian states for the last 10. Associations comprising of approximately 10 members can access sizable loans without collateral for small enterprises like local fish farming, and other relevant commercial services within respective states. In addition, such enterprises are further supported through micro-insurance services. In most African and South Asian states, owners of small-scale enterprises can insure their businesses against common risks like theft of assets, destruction from political instability, and natural disasters like floods and drought (Goldberg and Paladin 85). Unfortunately, microfinance development services are still immature in developing nations. Primarily, microfinance services are still at their growth stage, hence this mode of development suffers from considerable technical inefficiencies. An example of technical inefficiency encountered during implementation of microfinance development projects in Africa and South Asia is poorly defined goals. Initially, the main objective of microfinance development services in developing nations was improving medium and small-scale enterprises by elevating the socio-financial conditions of poor communities in African and Asian societies. Basically, microfinance development services were poverty-reduction mechanisms aimed at mitigating the difficulties experienced by economically vulnerable members of poor communities. In the process of implementation, objectives of microfinance development services have been poorly defined. Basically, governmental and private providers of microfinance services were supposed to prioritize the financial needs of impoverished entrepreneurs over profit maximization objectives of the providing organizations (Smith 63). However, the microfinance industry in African and South Asian nations has been dominated and exploited by greedy financial institutions. Instead of assisting poor persons and groups to access low-interest loans, both governmental and private microfinance service providers operate with high interest rates, meant to increase profits rather than elevate poverty conditions of their clients. Besides poorly defined goals, microfinance development programs also suffer from poor coaching and limited consultancy services. Technically, members of poor communities in African and South Asian communities possess limited levels of economic and financial literacy. Relevant empirical studies on literacy trends shows that on average, the literacy level of most African communities stood at 47% as by December 2013. Unfortunately, poor nations in West and East Africa like Burkina Faso and Somalia have lower literacy levels of 21.8% and 37.5% respectively (Gary 38). In South Asia, countries like Bangladesh and Nepal have literacy levels ranging from 50-55% (Hal and Shams 23). In this regard, substantial portions of communities living in African and South Asian nations lack the ability to read and write. Expectedly, these communities correspondingly lack in financial and economic literary. The lack of financial literacy is further worsened by the geographically remote locations inhabited by members of poor communities in the nations. In order for small enterprises to thrive, microfinance service providers should deliver financial knowledge and information to illiterate clients living in remote rural locations. Unfortunately, most microfinance providers lack the human and logistical resources meant to deliver financial literacy programs to clients. Statistically, microfinance service providers in African nations like Sudan and Niger are located approximately 70 miles from clients’ communities (Bhatt and Yang 322). Undeniably, such vast distances hinder timely and thorough delivery of capacity building programs; hence the lack of couching and poor consultancy services compromise on effectiveness of microfinance development projects. Second Argument Primarily, members of poor communities in African and South Asian nations live below poverty line. For example, approximately 48% of Kenya’s population lives below the poverty line (Gary 55). In economic contexts, living below the poverty line means that households in such communities earn below $1.25 each day. Typically, households in these poor nations comprise of multiple family members; approximately 5 children per household. Undeniably, supporting such large families with a daily income of below $1.25 is economically inconveniencing. Luckily, such impoverished households have been able to access loans of up to $500, courtesy of microfinance service providers (Gary 35). One of the leading microfinance institutions in South Asia is United Prosperity Foundation, an American organization that targets women in households economically crippled by poverty. In 2013 alone, the United Prosperity Foundation provided loans of $550 each to 80000 poor mothers in Bangladesh. Other organizations like USAID, which have a client base of approximately 62 million households across the world, have been able to provide household loans of up to $4500 (Khandker 202). When the efforts of these leading NGOs are combined with those of governmental and private financial institutions in Africa, it emerges that the microfinance industry provides substantial amount of development resources to poor communities in African and South Asian nations. Unfortunately, developmental outcomes associated with these vast resource allocations are still disappointing. Essentially, the vast microfinance resources fuel development projects in African and Asian nations, but the resources does not ignite and sustainably drive development programs. Governments, social organizations, and economic institutions are responsible for initiation and progressive development of poverty elevation mechanisms. Observably, one social problem affecting the utilization of microfinance resources in Africa and Asia is limited women empowerment (Bhatt and Yang 329). Despite being a socially noble campaign, women liberation in South Asian and African nations is not as practical as it is in American and European nations. Apparently, the persistence of patriarchic cultural structures in African and Asian families affects development. Unfortunately, most microfinance service providers target women, simply because they are more economically disadvantaged compared to their male counterparts. Unfortunately, women in these poor nations have limited social privileges and economic liberties in their communities. For instance, only 21% of women aged between 18-49 years in the Democratic Republic of Congo completed primary education compared to 47% of men who have attained the same level of education (Hal and Shams 29). In addition, cultural conservatism within African and Asian nations limits the decisional role of women in their families. In such patriarchy societies, it is not uncommon to hear of drunken irresponsible men violently dispossessing their wives of the microfinance loans, and subsequently spending the money on village drinking sprees. Therefore, domestic violence against women coupled with lack of education undermines the economic utilization of microfinance resources in developing nations. Besides the social problem of women empowerment, the economic issue of structural unemployment affects optimal utilization of microfinance resources in developing nations. Surprisingly, Zimbabwe fostered an unemployment rate of 95% in 2009. By December 2014, the unemployment rate in Zimbabwe had slightly dropped to 89%. In other nations like Bangladesh, unemployment rates stands at 47% (Khandker 199). In economic contexts, the negative effects of escalating unemployment rates in development cannot be overemphasized. First, high unemployment rates within a nation causes domestic economic recession, which manifests in form of skyrocketing inflation rates. Secondly, high unemployment rates reduce the purchasing power of consumers within a nation. In such cases, the positive benefits of microfinance resources are spontaneously neutralized by the negative economic effects of low consumer purchasing powers. For example, financial performances of medium and small enterprises in Zimbabwe are severely undermined by the low purchasing power of consumers within such poor communities (Goldberg and Paladin 107). Occasionally, small scale entrepreneurs relying on microfinance resources may never recover their start-up capital because of unfavorable economic conditions within their marketing environments. In this regard, the fueling role played by microfinance development resources in African and South Asian nations is irrefutable. However, optimal utilization of the development recourses in invariably compromised by localized social and economic factors within the nations. Counterargument Irrefutably, small-scale microfinance developments facilitate creation of a favorable atmosphere for economic growth. First, microfinance loans create and support medium and small scale enterprises, which are the chief creators of employment opportunities in developing nations. In staggering economies of South Asian and African nations, a small loan of about $120 can start and sustain small enterprises like local grocery stores (Khandker 202). Such stores not only generate income to the owners, but also absorb unemployed youth in the societies. Actually, such small businesses are known to lift households and individuals above the poverty line in less than a year. Previously, people in African and Asian nations relied on governmental organization for employment opportunities. However, rapid growth of small and medium enterprises has dispelled myths associated with incomparability of government jobs. Uneducated youths, and even college graduates are increasingly turning to small and medium enterprises for income generation. Undeniably, economic growths witnessed in African nations like Kenya are largely attributable to the role of small and medium scale enterprises in the economy. Fortunately, initiation and growth of the SMEs in developing nations is attributable to ease of access to microfinance development resources (Gary 33). Therefore, the positive attributes of small-scale microfinance developments in countries’ development are well founded. Refutation Refutably, the significance of small-scale microfinance developments in nation building should not be overestimated. In fact, small-scale microfinance developments cannot occupy a primary position in a nation’s economic development fronts. As aforementioned, other essential factors for economic development include low crime rates, political stability, and suitable business environments. In the presence of civil wars and political turmoil, entrepreneurship cannot prosper. For example, mass eviction of persons in poor African nations like Sudan undermines utilization of microfinance resources. Also, stability of business policies is influential in economic growth. Essential parameters of business policies include flexibility of labor markets, low commercial interest rates, and stable monetary policies among others (Goldberg and Paladin 94). Unpredictable fluctuations of these parameters discourage foreign and domestic investments. Contrarily, stability of business environments encourages growth and practical application of entrepreneurial ideas, thus facilitating economic development. Finally, increased insecurity associated with high crime rates impacts economic development. Criminal activities like violent robberies scare away domestic and foreign investors (Bhatt and Yang 330). Consequently, lack of investments severely undermines economic growth. In this regard, influential factors discussed above should not be abandoned at the expense of small-scale microfinance development programs. Conclusion In conclusion, it is undeniable that arguments presented in preceding sections of this paper sufficiently answered the question; Are small-scale microfinance development projects the best approach to development in Africa and South Asia? Actually, arguments presented argued that small-scale microfinance developments are significantly influential in improving the economic developments of African and South Asian communities, but the microfinance approaches lacks in the required levels of efficiency over other methods of development. First, detailed weaknesses of microfinance developments, especially poorly defined goals, and lack of consultancy services, were sufficiently explored. Arguably, goals adopted by microfinance service providers within practical contexts contravene the intended purposes of the microfinance development industry (Smith 57). Also, limited provision of couching and consultancy services undermines effective utilization of microfinance development resources. Secondly, effective utilization of microfinance development resources is affected by social and economic conditions prevalent in developing nations. Despite the role of small-scale microfinance development programs in providing enough resources for development, expected outcomes of such programs are invariably restricted by social factors like limited women empowerment, and economic attributes like high unemployment rates prevalent in African and South Asian nations. Implications and Recommendations Admittedly, arguments presented in supporting the thesis statement indicated that benefits of microfinance development programs are often overestimated. In most cases, challenges associated with microfinance development projects in African and South Asian nations go unreported. In an effort to assert their importance in economic growth within developing nations, governmental and nongovernmental providers of microfinance services pay little attention to shortcomings of these projects (Bhatt and Yang 328). In reference to arguments developed therein, more efforts and resources should be directed towards ascertaining the nature and magnitude of inefficiencies associated with small-scale microfinance development programs in developing nations. Technically, quantitative research exercises should be conducted in order to unearth the depth and breadth of challenges faced by clients of microfinance development services. Also, the primary role enjoyed by microfinance development programs in poverty elevation should be reconsidered. Other influential factors like political stability, social structures, and national business policies should occupy the same position enjoyed by microfinance programs in poverty intervention projects. Works Cited Bhatt, Nitin and Yang, Shui. “Delivering Microfinance in Developing Countries: Controversies and Policy Perspectives.” Journal of Policy Studies 29.2 (2011): 319-332. Print. Gary, James. Microfinance: “A Comprehensive Review of the Existing Literature.” American Journal of Entrepreneurial Finance 9 1 (2009): 34-51. Print. Goldberg, Mike and Paladin, Eric. Managing Risk and Creating Value in Microfinance. Pittsburg: Cengage Learning, 2014. Print. Hal, Mamiza and Shams, Pathan. “Efficiencies of Microfinance Institutions: A Data Envelopment Analysis.” Journal of Asia-Pacific Financial Markets 17.6 (2013): 19-34. Print. Khandker, Shahidur. “Microfinance and Poverty: Evidence Using Panel Data from Bangladesh and other South Asian Nations.” Journal of South Asian Development 13.4 (2012): 192-204. Print. Smith, Michael. “Rural Microfinance Service Delivery: Gaps, Inefficiencies and Emerging Solutions.” African Journal of Finance and Accounting 82.5 (2013): 50-67. Print. Read More