Capitalism has seen the admittance of large-scale poverty across the globe. Lower income quartile is strikingly a prominent aspect in the modern day economy. Chances for upward mobility for the lower class remain low, with the affluent occupying a special economic niche in the world. Banking and massive access of loans has been an occupation of the affluent. Actually, the rich have perpetually dominated the economic frontier. Banks view the admittance of the poor to the loans program as burdensome, as running of banks is utterly an exorbitant venture. Thus, the poor had not occupied as a special place in the banking sector. While this has been the trend, this is gradually changing to extend loan benefits to low earners, the phenomenon referred to as micro financing. This is undoubtedly a wave that has seen a massive transformation of the economic frontier become a reality. Micro financing extends economic benefits to the poor by channeling resources to the rural areas, issuance of small loans, and micro credits with major participants such as NGOs, cooperatives, and Banks among others.
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Micro finance has witnessed a holistic growth in the economic frontier. Hulman and Arun observe that, since the 1980s, microfinance has been instrumental in enhancing speedy development (1). By the early 21st century, millions of people in more than 100 countries had managed to access formal and semi formal microfinance institutions. The concept of micro financing for its promises has witnessed the admittance of aid agencies, non-governmental organizations, cooperatives, banks, and governments.
Micro financing has seen a massive transformation in the marginalized communities. For instance, Bangladesh through the Grameen Bank, visualized an economic transformation through the adoption of a ‘bottom-up’ approach, by targeting the marginalized, particularly women (Hulmer & Arun 1). Micro financing aims at the use of group lending approaches which are cost-effective. Given that banking is quite an involving venture in terms of cost, even when dealing with smaller incomes. The group-based methodologies aim at cutting on administrative expenses, contract design, and enforcement transactions, and loan recovery. What micro financing seeks to accomplish is to extend the gains of modern day capitalism, to those with low-income quartiles, instead of calling for a complete overhaul of capitalism, as radicals would suggest.
Micro financing is emphatic on the fact that, access to financial services should be viewed within the lens of a public good (Sundaresan 3). In this vein, there should be a vigorous participation of a large group of people within a market-based economy. The concept of micro financing is actually a timely response to the government rural credit schemes to reach small-scale farmers. Micro finance has seen the opening up of opportunities to the less privileged. The aspect of micro finance encapsulates “group lending” or self-help groups” (SHGs), where loans are extended to the members in a group of borrowers (Sundaresan 3).
Micro financing is perpetually gaining footing in different parts of the world. The affluent recognize the fervency of this new wave, granting it every possible support. In fact, the year 2005 was declared as the “Year of Micro Finance” (Sundaresan 3). This sector continues to receive perpetual growth courtesy of massive support from different factors such as Pierre Omidyar, founder e Bay by announcing a $ 100 million microfinance fund (Sundaresan 3).
Microfinance has been deemed messianic for its attempts to mitigate poverty, particularly among women. The concept of micro finance has perpetually gained currency among developers, for the tangible efforts in alleviating poverty among women. Dhar postulates, any micro finance lending to women has chances to increase women’s income levels, bettering chances for economic independence (12). The 1995 Micro-credit Summit had Hilary Clinton highlight that, “micro-enterprise is the heart of development” (Dhar 13). The U.S. first Lady views micro finance as an avenue for growth at the fact that, even $ 10 could help to lift a woman from poverty. Self-employment becomes a reality. The earlier structures had not valued women as credit-worthy, due to the patriarchal nature of banking structures. With the advent of the present microfinance policy frameworks, micro finance has proved a reliable avenue for women to better their growth opportunities, something that other macro finance institutions are beginning to grapple with by giving loans to women. For instance, the Grameen Bank in Bangladesh, through its efficient organizations such as the grocery stores of North America, the Grameen, trust have seen the eventual extinction of poverty among women (Roy 7) . Economic sustainability is possible through the adoption of a bottom-up approach. Actually, women lead in abject poverty, thus the idea of micro finance is both timely and reliable.
The rural population pays special allegiance to microfinance institutions. Rural prosperity has a bearing on micro finance institutions. Given that rural populations have their livelihood from agriculture, resources need to be channeled here, something that the governments have not successfully managed to do. Nevertheless, Micro finance institutions have registered an exemplary performance in this domain. India, for instance, through the National Bank for Agriculture and Rural Development (NABARD) formulated the Self Help Group Bank Linkage Programme in 1992, and, by 31 March 2010, the returns were satisfactory, with more than 4.9 million credit linked to self-help groups (Swain 1). This was a major attempt to assist about 97 million poor rural households (Swain 1). Micro finance institutions have been, and are a force to reckon with, given that banking and financial services are constrained in urban areas. In fact, the Reserve Bank of India estimates that about 40% of India’s population has limited access to financial services (Swain 1). Micro finance is undoubtedly an avenue for the poor to better their chances for upward mobility. Banks in India focus on priority and profit maximization, thus, admittance of the poor to the financial programmes is deemed a financial predicament. Due to volatility and high risk associated with the poor, banks choose to serve the affluent. Micro finance institutions have continued to transform life in rural areas.
In fact, Microfinance is a democratization of capital targeting a transformation of hitherto exclusionary schemes, in a bid to elevate the poor. Microfinance is actually a democratization of development (Roy 8). Taking cognizance, of the fact that banks are avenues to serve the affluent, it therefore emerges that, efforts to transform the situation are urgent.Micro finance is deemed as the revised capitalism. In fact, capitalism had not extended benefits to the poor. Nevertheless, micro finance is a revised version of capitalism dubbed, “creative capitalism”. The economic situation in the world has been asymmetrical. In fact, the world’s 500 most affluent individuals have a combined income that far outweighs the poorest 416 million, according to a report prepared by the United Nations Development Program (Roy 8). While the United States leads in Overseas Development Assistance at 0.22%, this is a mere drop in the ocean, as large-scale poverty dominates the scenario (Roy 9). Thus, the need for a bottom-up approach is the panacea such as micro finance.
Microfinance initiatives have continued to experience impediments as regards progress. Micro finance institutions have been earmarked for preference of informal credit sources by choice (The World Bank Research Program 43). Micro finance institutions prefer this approach mainly to avoid additional regulatory sector. The formal financial sector is emphatic on proper procedures, policies, and methodologies, something that the informal sector aims to avoid. This claim was arrived at by testing hypothesis using enterprise level data in 3500 enterprises from 29 different countries (The World Bank Research Program 43). This was found to have deleterious effects on efficacy, particularly in the tax administration domain. Blatant corruption is an irresistible force in the administration of tax incentives. According to the World Bank research program, 17% of the 3500 enterprises preferred informal finance. This poses impediments on efficacy as regards proper monitoring and evaluation. Eventually, these micro finance institutions experience a lapse in proper management derived from a compromised regulatory environment.
Micro financing has been viewed as utterly exploitative. At the fact that money borrowers are poor, the microfinance institutions fail to grapple with this particular fact. In fact, micro finance institutions have been deemed enigmatic, as they purport to eradicate poverty while at the same time introducing policies that exacerbate the situation. The introduction of usurious rates on the borrowed loans, is monopolist and unfeeling to the poor, raising the feasibility of microfinance institutions. In a survey conducted by Singh in India’s Punjab region, it was established that micro finance institutions had an annual interest rates at 134 to 159 percent, higher than commercial bank interest rates (Armendariz & Morduch 28). This is a worrying trend, given that a vast majority of people continues to wallow in abject poverty.
Retrospectively, the search for economic sustainability is involving. The key world financiers such as the Breton woods institutions namely the World Bank, the International monetary fund, and the World Trade Organization may not complete the task of poverty eradication. To that extent, the evolution of micro finance is undoubtedly a voice to reckon with as a panacea to the recurrent poverty. In this vein, micro finance for its bottom-up approach has managed to challenge the quagmire of poverty. Micro finance aims at extending benefits of capitalism to the poor. Women have perpetually benefited from micro finance initiatives. While Micro financing may be a panacea to the challenge of poverty, certain challenges emerge such as poor managerial skills, introduction of usurious rates on borrowed loans, which works to the peril of the poor. Nonetheless, micro financing initiatives have perpetually dealt with the challenge of poverty, and this appears to be readily available avenue for people to salvage themselves from the chain of poverty.
Armendariz, Beatritz and Morduch Jonathan. The Economics of Microfinance. Massachusetts: The MIT Press, 2007. Print.
Dhar, Samirendra. Micro-finance for Women: Necessities, Systems, and Perceptions.West Bengal: Northern Book Centre, 2005. Print.
Hulmer, David& Arun, Thankom. Microfinance: A Reader. New York: Routledge Publishers, 2009. Print.
Roy, Ananya. Poverty Capital: Microfinance and the Making of Development. New York: Taylor and Francis, 2010. Print.
Sundaresan, Suresh, M. Micro finance: Emerging Trends and Challenges.Cheltenham: Edward Elgar Publishing Limited, 2008. Print.
Swain, Ranjula Bali Bali. The Microfinance Impact. New York: Routledge Publishers, 2012. Print.
The World Bank Research Program, 2005-2007. Abstracts of Current Studies. Washington: The International Bank for Reconstruction and Development, 2007. Print.