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Microfinancing: A Solution to Poverty? Essay

Microfinancing: A Solution to Poverty?

Analysis of Microfinancing through the Case of the Grameen Bank and its Effect on Society

Microfinancing is a time-tested and sustainable approach to seeding entrepreneurship in developing nations through grants of peer-guaranteed small loans. Microentrepreneurs dramatically improve their family’s standard of living. (www.laddersofabundanceblog.org)

INTRODUCTION

Several efforts along the line of social development work have already been undertaken in an effort to bring the concerns of the poor to the core particularly in addressing poverty. Community development work which was popularized in the late 70s is one of the earlier attempts to organize the poor as a way to enable and empower them to address their economic needs through self-reliance and bottom-top approach (Neighborhood Founders Group, 2007).

            In the history of community development work, microfinancing schemes have eventually been integrated into the community organization activities because of the need of grassroots communities to increase their economic resources. While there are other social development concerns (e.g. environmental, women’s, and peace and order issues), financial adversity and poverty remained the most decisive challenges confronting the economically disadvantaged groups thus paving the metamorphosis of community organizations becoming microcredit and microfinancing organizations and communities.

            In fact, quite a number of community organizations in the

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Philippines that were established aimed at addressing environmental and empowerment concerns ended up becoming cooperatives and microlending institutions because of the ominous need of people for economic resources rather than other non-government- and government-induced concerns like environmental problems which to them may be imperative but not immediate (Javier, 2005).

Microfinancing is a scheme which provides a broad range of monetary services to its clients and offers a wide range of opportunities for success as opposed to micro lending which only covers loans and credits. Such opportunities may include but not limited to services such as savings, insurance, housing loans and remittance transfers (www.laddersofabundanceblog.org). Loosely defined, microfinancing provides small amounts of capital to the poor to enable them to generate their own income (Fairley, 1998).

            The question of whether or not microlending activities indeed address the needs of the poor remains a prospect in the field of research. Hence, this current terminal report looked at the prospects and challenges of microlending activities in various parts of the world with Grameen Bank as the focus and the case in point.

            This paper aimed to determine the impacts of microfinancing on the lives of the poor. Specifically, it aimed to answer the question, “does micro-finance help alleviate poverty and to what extent it improve the lives of the poor?” With such research query, this paper elucidates that microfinancing is an effective way to tackle poverty given the best practices exemplified by the Grameen Bank in Bangladesh.

            Primarily based on existing literature and empirical studies on microfinancing, this qualitative-quantitative research on micro-financing will paint in broad strokes the nexus between poverty alleviation and microfinancing through the use of anecdotal and empirical evidences. While this research will focus on the Grameen Bank, other studies on microfinance from other parts of the world are also presented to establish the causal relationship between poverty alleviation and microfinance enterprise.

ABOUT GRAMEEN BANK

The Grameen Bank, which main thrust is “enable the poor, mostly women, to lift themselves out of poverty and make better lives for their families,” is providing various institutional services to its worldwide network which include supporting microfinance institutions, harnessing the power of technology, connecting microfinance institutions with capital markets, and expanding microfinance industry knowledge (www.grameenfoundation.org).

            With the goal of harnessing the capacity of the poor women to earn income, the microfinance program has been the center of many services provided for by the bank to its partner-beneficiaries. In fact, in the Grameen Foundation’s website, anecdotal evidence suggests that microfinance indeed is a powerful tool in fighting poverty.

            The history of the Grameen (a local word for village) Bank owes much to its founder Muhammad Yunus, a noble prize awardee, who first initiated an institutionalized microfinance program in Bangladesh in the midst of an economic limbo in the 70s. In 1976, he first started an experiment allowing 42 women to borrow 27$ dollars. With its success, the foundation already has more than 3.2 million client-partners from 22 countries (such as the Philippines, Cambodia, Vietnam, Sri Lanka, India, Pakistan, Peru, United States, amongst others) to date and continuously growing.

            The Grameen bank, which later gave birth to  the Grameen Foundation established in 1997, targets the poorest of the poor particularly women as their partner-beneficiaries.  As of December 2003, the foundation has been running a total of 1, 178 branches in 22 villages scattered all over Bangladesh (Ibid.).

            Grameen Bank, whose mission is to provide access to loan amongst the poorest of the poor, lends money for the purpose of enticing poor individuals to become entrepreneurs. Such mechanism allows the poor to become self-sufficient and to help augment their daily living in a sustainable way without dependence from external dole out supports. The efforts of Grameen Bank also help the poor get away with mendicancy.

            Unlike commercial  banks and microlending institutions, the bank does not require any collateral from its borrowers. Such mechanism is really sensitive to the poor particularly because they do not have enough resources and means to pay their debts. Besides, these people do not have any possessions that would even be considered a collateral.

            The mechanism of not asking the poor a collateral ensures that the clients would not hesitate to participate because of the fear that they might be in conflict with the law due to non-repayment of debts. As such, borrowers are not required to sign any documents. However, borrowers are required to join a group of 5 members before they can actually avail of the loans.

            While the responsibility of paying debts solely rests on individual borrowers, requiring the creditors to join a group is a mechanism to ensure that there is check and balance. As such, members of a group are required to oversee and to ensure that their group members are paying their debts. The existence of a some sort of a grouping serves as a social pressure so that each member is obliged to pay to save his face from shame (www.grameen-info.org).

            Such approach explains why there is still a high rate of repayment despite the absence of collateral. In addition to that, mature clients are now required to avail of the saving deposit services of the bank to ensure security of loans. The bank also operates on a good faith basis. Giving trust and opportunity (which is relatively rare) amongst poor really drives them to work hard and to ensure that they would be able to pay otherwise it is going to be difficult for them to avail of the services of the bank subsequently (Ibid.).

            The establishment of the Grameen Bank was Yunus’ response to the growing poverty incidence in his country following Bangladesh independence. A Fulbright scholar from a university in Tennessee, Yunus went back to his country to teach, which later became an instrument to his realization that economic theories in books were far from what he observed in his surroundings. To date, the bank has a total borrower of 7.01 million in Bangladesh, 97% of which are women (Ibid.).

            To date, the bank has disbursed a total of  6.07 billion dollar since its formal establishment. Out of that amount, 5.40 billion dollar has already been returned or repaid. On the average, the loan recovery rate of Grameen Bank is  98.49 percent, which is very high considering the absence of collateral.  Unlike most banks, commercial and government alike, Grameen Bank has an interest rate which is lower t. The average size of loan the bank offers is less than 100 dollar (Ibid.).

            The bank has four interest rates for loans depending on the type of loans being availed. For the income generating loans, the interest amounts to 10%. For basic necessity loan such as housing, interest rate is pegged at 8%. The bank also offers student loans with a  5% interest rate while 0% interest for loans availed by beggars who are considered to be the poorest of the poor. The interest rate maybe specifically high especially if one avails of the income generating loans but such rate is justifiable because of the administrative and cover costs (Ibid.).

            The Grameen Bank has also designed conditions and implementing rules and regulations sensitive to the needs of the poor. Such conditions include the following, [1] small loans are provided without collateral, [2] loans are payable in weekly installments within a year, [3] eligibility for subsequent loan will depend upon the payment of the previous outstanding loan, [4] close supervision and monitoring by the bank’s staff to ensure repayments, [5] conscientization amongst the poor the need for credit discipline, and [6] special safety net through compulsory savings (Ibid.).

            Besides the microlending services,  Grameen bank has also expanded its operations. Such expansion is  strategic given the theories of economies of scale and economies of scope.  The bank has been offering housing loans dubbed as the Housing for the Poor Program which was introduced in 1984. In fact, the program has received a commendation from the Aga Khan International for Architecture in 1989.

            Grameen Bank has also been providing scholarships every year to high performing children (with preference for girls) of Grameen Bank clients to encourage children to stay at school.  To date, the scholarship grant has already supported a total of 35, 696 children. Besides the scholarships, the bank has also been providing educational loan services to its clients particularly those with children studying at the university level (Ibid.).

Review of Related Literature

The succeeding section presents the various existing literature and researches that either support or contradict the contention that microfinancing is an effective way to help the poorest of the poor move out of poverty. Subdivided into four, this section shall consist of the; [1] About Grameen Bank Microfinancing Schemes, [2] Success of Microfinancing Schemes, [3] Failures and Challenges of Microfinancing Initiatives, and [4] Microfinancing Schemes in other Parts of the World.

About Grameen Bank Microfinancing Schemes

            Mainsah, Heuer, and Kalra, and Zhang (2004) came up with an integrated report on Grameen Bank entitled “Grameen Bank: Taking Capitalism to the Poor.” Their report explored the institution’s origin, structure, culture, performance and microfinance expansion.

            The authors described several features of Grameen Bank. First of which is the bank’s credit delivery system which is primarily directed to the poorest of the poor. The Grameen Bank also offers lending to groups of 5 to 10 members. Besides its provision of loans and credits, the bank also provides incentives and compensations to branches which accordingly have notable performance. Recently, the bank is now even providing telephone and internet connections to both residential and industrial establishments in Bangladesh.

            The article of Mainsah et. al. (2004) has presented several contentions which demonstrate the success of the Grameen Bank in addressing the challenges of the poorest of the poor. As they asserted, “the bank‘s success must be measured in terms of its social and financial standards.”  Furthermore, their paper has presented several evidences that maintain the achievement of the bank’s microfinance initiative in addressing poverty issues with particular focus on women.

For instance, as what Pitt, Khandker, and Cartwright (2003, 1998) posited as cited by Mainsah et. al. (2004), “the empowerment effects more than the income-substitution effects, drove the results of their study, which demonstrated that [Grameen bank] communities benefit more when loans are disbursed by to women rather than men.”

            Their article concluded that millions of client-beneficiaries have already stepped up closer to moving out poverty since the Grameen Bank has started. More essentially, their article highlighted the success of the institution’s microfinancing program despite the absence of collateral as most of the commercial banks and financial institutions would require.

Success of Microfinancing Schemes

            In a report catalog of Asian Development Bank entitled “Credit Makes Good Business Sense for Poor Women”, microfinance initiatives had been seen to be dramatically affecting the lives of the poor Pakistanis through increased income, better health, and improved self-esteem. Such findings have been corroborated by anecdotal evidences testifying the success of Khushali Bank in Pakistan.

As the president of the Khushali Bank puts it, “investment in poor women has been recognized as one of the most effective strategies to reduce poverty and improve the status of women.” Many client-partners of the bank attested that the program has indeed increased the self-esteem of women, empowered them in terms of decision making processes, and ultimately empowered them to become productive citizens.

            To support such claim with a real life experience, the report narrated an experience of a certain client who had heard of the loans being offered by Khushhali Bank on a no collateral basis. Such client quickly signed up for a PRs10, 000 loan which is roughly about $175. Such amount went to her mini grocery investment which allowed here to earn PRs2, 500 to PRs3, 000 a month (between 79 t0 88 dollars a month).

            While the article of Fairley (1998) enumerated the challenges and failures confronting microcredit development enterprise, the author did not fail to recognize the positive impacts of such activities on the lives of the poor. As the author cited, “[e]conomically, the positive effects of microenterprise are also far reaching….business skills are developed and employment opportunities are increased….and income source is established.”

The article also cited social and political implications of microenterprise development. Governments are now aware of [1] the collective desire of the poor to become self reliant and [2] their failure to provide basic services to the poor. In terms of its social impacts, individuals in poor communities had significantly increased self esteem and women in particular are now empowered.

            Though maybe indirect, the success of the microcredit schemes in terms of gaining attention from various governments such as the United States and in terms of receiving full recognition of the program as a means to promote the Millennium Development Goals, are indeed manifestations that the microfinance programs are addressing the needs of the poor particularly in an attempt to move the poor people out of poverty (Mainsah, et. al, 2004).

The success of the Grameen Bank actually paved the way to the creation of the Micro Credit Summit in 1997. In terms of coverage, the summit had identified 41.6 million people in the poorest category who have already availed various forms of microlending services.

            The written report published by the Grameen Foundation USA on measuring the impacts of microfinance has presented scientific and statistical reports proving the effectiveness of microfinancing in addressing poverty issues amongst the poor in many parts of the world.

            For instance, the study of Mahubhub Hossain (1998) entitled “Credit for the Alleviation of Rural Poverty: The Grameen Bank in Bangladesh” established that members of the microfinance program have raised their income up to 43 percent compared to non-participants. Such increase in income was particularly observed amongst the landless followed by marginal landowners.

            Khandler (2005) conducted a similar study utilizing an improvised model used by Hossain (1998). Using a panel data, the findings of his aforementioned study showed that 100 taka credit amongst women yielded an incremental household expenditure by more than 20 taka. In addition, the study also proved that between 1991/1992 and 1989/1999, the poverty incidence reduced to about 17 percent.

            A longitudinal study comparing client and non-clients of a Grameen-inspired microfinance institution was conducted separately in India, Zimbabwe and Peru. In India, Chen and Snodgrass compared the impact of the microfinance programs on the economic well-being of those who borrowed to operate self-employment activities with those who saved with SEWA Bank without borrowing, and compared both groups with non-clients. Results of their study claimed that borrowers’ income were higher by 25% compared than the savers, and 56% higher compared with the non participants. In a similar study conducted by Dunn and Arbuckle (2001) in Peru, their results showed that microfinance clients earned $266 more per household member per year as opposed to non participants.

Using an ethnographic approach in gathering data, Helen Tood in 1996 looked at the impacts of microfinancing by spending a year in two Grameen villages. While quantitative researches do not really capture the details of the impacts, Tood painstakingly collected narrative evidences amongst women-borrowers to be able to present a holistic view of the impacts of microfinancing to the lives of women and their families. Utilizing 64 households, her study construed that about 57.5 percent of borrower households were no longer poor (compared to just 18 percent of the comparison group).

            Gwen Alexander (2001) a seasoned economist from the Fordham University conducted an empirical analysis of microfinance using longitudinal data from the AIMS study of Mibanco, Peru adopting Coleman’s model. Her study found that  microcredit contributed an additional enterprise profit to the tune of $89 per month amongst their creditors.

            Barnes, Gaile, and Kimbobo (2001) conducted an impact assessment of three microfinance programs in Uganda. In their investigation, they found out that “significantly more clients (43 percent) of the three programs than non-clients (31 percent) reported an increase in profits from their primary enterprise. Clients were more likely to become homeowners and spent significantly more on school fees for their children. Participants showed a greater increase in durable assets, and half of the clients increased their savings over the previous two years, compared to a third of the comparison group.”

Helen Tood (2000) conducted an economic impact study on a microfinance project in the Philippines entitled “Poverty Reduced Through Microfinance:  The Impact of ASHI in the Philippines.” In her study, she particularly answered the question, “what is the impact on clients who stayed with ASHI through at least four loan cycles?” Results of her study indicated that over 75% of the women were classified very poor when they started with the program.  At the conduct of the study, only 13% remained very poor as compared to non-clients.

Failures and Challenges of Microfinancing Initiatives

In a report entitled “The Power and Limits of Microfinancing” published by the Development Update, some development experts provided caveats that microfinancing schemes per se may not be an effective strategy to address poverty issues. As the article posits, “many microfinancing loans require little or no collateral and are often granted to women in households with few financial assets. Thus repayment may become a major challenge.”

            The article also cited Koffi Annan’s statement on micro credit which according to him, “in some cases, poor people are not in a position to start their own businesses, even with funding, because they may lack the skills and motivation to successfully manage a business….Money devoted to microfinancing may be diverted to other worthy goals such as basic education and health services in poor communities.” The article also mentioned that the best anti-poverty strategy is to incorporate microlending investment with other activities that would expand a country’s infrastructure and basic services.

            The article written by Joanne Fairley entitled “New Strategies for Microenterprise Development: Innovation, Integration, and the Trickle up Approach” published by the Journal of International Affairs supports the contention that the microenterprise development has become one of the most promising mechanisms to poverty alleviation with practically hundreds of programs implemented by many diverse institutions scattered from around the globe. However, the article cited that while microfinancing is an essential tool to fight poverty, such scheme is just one of the many aspects of microenterprise development.

The article cited 6 major pitfalls of microcredit namely, [1] many microcredit enterprise only work with communities that are capable to pay credits for financial security purposes, [2] government microcredit programs tend to be both paternalistic and distrustful of the poorest, [3] difficult selection of the poorest of the poor because it consumes time, [4] state policies and unstable economic climate, [5] the poorest of the poor don’t want to assume financial risk, and [6] inflexible credit criteria which is beyond the means of the poorest.

            Besides those assertions, Fairley (1998) pointed that one side effect of the microcredit institutions that primarily operates with microcredit is that “they tend to focus on repayments and institutional sustainability rather than on poverty alleviations.”

            One of the challenges confronting microfinance institutions is the possibility of accumulating overdue loans and bad debts which may pose less capital accrual in the future. Such event may create a serious ramification particularly on the other members’ capacity to loan. Since monetary resources are depleting due to bad debts, members may have a less chance of borrowing money (Mainsah et. al., 2004). Worst of it all, some of the microcredit programs disappeared because of its inability to recover its capital such as the case of the GROUP Foundation[1] microcredit program (GROUP Foundation Report).

            The report of Mainsah et. al. (2004) identified three major criticisms of microfinance programs following the mandates and guidelines set forth by the Microcredit Summit Campaign in 1997.  According to them, it is rather difficult and costly to identify the so called poorest of the poor. Second, credit programs that indeed genuinely targeted the poorest of poor had a hard time making themselves self-sufficient because of poor turn over of collections. Third, the authors argued that institutions that really reach the poorest of the poor do not really help but will only add debt to the other burdens of the poor.

Microfinancing Scheme in other Parts of the World

Microfinancing in the Philippines owes much its history to the emergence of non governmental organizations in the country. Based on the Grameen Bank approach of service delivery, most of microfinancing initiatives amongst NGOs in the Philippines are juxtaposed with activities that would alleviate poor people from poverty. In the country, there are three categories of microfinancing institutions. These included thrift or rural banks, NGO based microfinancial services, and credit unions or popularly known as cooperatives.  Of the three, it is the NGO based microfinance programs that really caters the need of the poorest of the poor since these do not require collateral as opposed to the other two types of MFI.

In Malaysia, the Amanah Ikhtiar Malaysia (AIMS) is the most dominant microfinancing institution which was established in 1987. Until 1998, the institution has offered a total of 103,000 loans and disbursed a total of 86 million dollars. AIMS activities have been principally directed almost by and large to the alleviation of poverty amongst the most disadvantaged group in the country. It was after all instituted to provide small loans to the very poor households to finance income generating enterprises as pointed by Gibbons and Sukor Kasim 1990)  cited by Conroy (2003).

Thailand is considerably the least amongst the countries in the region that really need microfinance services because of its relatively high economic performance. Besides this economic justification, most non-governmental organizations in Thailand do not really involve themselves in providing microfinance services so much so that until 1998, microfinance services remained limited.

            As observed by Conroy (2003), the microfinance service delivery in Indonesia differs from the other countries in the region because it lacks attention from statesmen and policy makers, much less among NGOs. There are two salient reasons to explain why the MFI in the country did not flourish as compared to countries such as the Philippines. First, the capacity of regulated financial institutions in Indonesia did not fail to provide credit services even to the remotest of places ensuring that the poor are also reached. Second, most of the foci of non-government in the country were not directed to financial services but rather on other basic services.

            Cambodia has crafted a unique model of microfinance services which has been aptly described as transformative since it followed a unique transmutation from being part of the services of the NGOs becoming microfinance institutions and finally converting into specialized microfinance banks.

Synthesis

            The review of related literature provided qualitative and quantitative studies that support the contention that indeed the microfinance programs are effective means to alleviate the poor from poverty such as those conducted by Fairley (1998), Barnes, Gaile, and Kimbobo (2001), Tood (2000) and Alexander (2001). Although there are standing criticisms against the microfinance programs, such discourses do not destruct the  credibility of such enterprise. Most of these discourses focus on the administration of microfinancing programs rather on  the effects or impacts of such programs on the lives of the poor.

            In fact, the literature review attests to the success of the microfinance program as reflected by the proliferation of Grameen inspired-banks elsewhere. The section enumerated various programs on microfinancing outside of Bangladesh which is a clear manifestation that indeed the program has been successful otherwise no institution will have the motivation to replicate such program.

            Over-all, the Grameen Bank  has been very successful in alleviating the poor from poverty as suggested by  the studies presented in this section.

Discussion

Measuring the impacts of microfinancing services on the lives of the poor particularly in their effort to move out of poverty remains a critical question especially amongst the various experts of the social science disciplines. With such diversity of opinions and stance over the matter, there is now a standing contestation between the measures of impacts of microfinance on poverty alleviation particularly in two dichotomies namely quantitative vs. qualitative and between statistics and versus anecdotal evidences. Besides the question of the effectiveness of impact measures, microfinancing whether it alleviates the poor from poverty or not remain a central debate in many discourses.

            This particular section presents the answers to my research question “does micro-finance help alleviate poverty and to what extent it improve the lives of the poor?” Divided into two, this section enumerates the anecdotal and qualitative evidences to corroborate my claim that indeed the microfinance initiative can transform the lives of the poor especially in their way out of poverty.

            While existing literature have already been presented in the earlier parts of this research paper [review of related literature], the backdrop from which the discourses of this section are derived came from empirical evidences and existing literature not previously mentioned. Since this research is utilizing secondary data, much of the claims and analyses of this terminal report are based on data taken from published research materials.

            Furthermore, quantitative and empirical studies using statistical examination shall also be presented to establish the relationship between microfinance and poverty alleviation in economic and mathematical fashion. While there are criticisms on microfinancing as presented in the review of literature, I am convinced that microfinancing is indeed a crucial tool in addressing the poverty amongst the poorest of the poor.

            In terms of looking at the impacts of microfinance on the lives of the poor on a micro level (that is within a household), a lot of anecdotal evidences show that to some respect, microfinance has indeed changed the economic lives of the poor. For instance, as discussed in the literature review, qualitative studies such as the one conducted by Tood (1996) utilizing ethnographic approach, provided descriptive narration on how microfinance has changed the quality of lives of the poor. Similar to Tood, Fairley (1998) also presented narratives depicting the impacts of the program on the household. He narrated this story:

“Ellen Perera is from the north of Sri Lanka, where she lived until about a year ago. Her father was a tailor in Jaffna but was killed when Tamil rebels attacked his store. The family tried to survive but was eventually forced to move in order to find work on the tea estates. Ellen found out about HDF’s self-help groups and became an active member. Because of her situation, she qualified for Trickle Up seed capital and was able to buy a sewing machine. Now she is making a regular income, her younger siblings are in school and her mother helps her with the business… (In Fairley, 1998)”

As pointed out in the earlier paragraphs, the concept or the model espoused by the Grameen Bank has already been replicated in various parts of the world. If replicability is a measure or an indicator of success, then we can simply surmise that indeed microfinance programs are really contributing to the poor otherwise such scheme could not have spread in a swift fashion across the globe. In fact, Mohammad Yunus (2003) had this to say:

“Our success in Bangladesh led me to hope that our microcredit methodology could have universal applicability. During the late 1980s and early 1990s, we proved that the Grameen idea could improve the lives of the poor throughout the world. Pilot projects in Malaysia and the Philippines led the way.”

Second, setting aside the issue of applicability, other microfinance initiatives in other parts of Asia, Grameen Bank-based or not, also proved effective in addressing the needs of the poor. The table in the succeeding page exhibits the various organizations in Asia with their corresponding achievements and features vis-à-vis their microfinance projects.

Name of Organization
Country
Achievements and Features
Tiljala Society for Human Education and Development
India
v  Works for urban informal settler communities  focusing on their rights (rights-based)

v  TSHED has been able to help families start 150 microenterprises.

Naw Bharit Jagriti Kendra
India
v  An NGO that works with a schedule cast or dallit communities.

v  The group has used microenterprise as the chief means of empowering families so they can become more socially and politically aware.

v  Families use the seed capital to start and expand businesses, such as shoemaking, basket weaving, etc.

v  Over 200 dallit families have been supported by the scheme.
Jan Jagriti Kendra
India
v  Works with schedule caste communities

v  Emphasizes empowerment amongst the underclass

v  The organization utilizes microenterprise to decrease the power of moneylenders and provide lower caste families with the skills to manage their own futures.

v  Assisted 150 families for the micro enterprise program.
Organization for Mothers and Infants
Bangladesh
v  Works in the Shylet District of Bangladesh

v  Aimed to educate and empower women

v  15 women have been involved in the activity doing basket weaving as their business

Human Development Foundation
Sri Lanka
v  Works with internally displaced populations and other minority groups.

v  Offers primary education, vocational training, and microcredit.

v  Offers seed capital to start up livelihood projects.
Source: Mainsah et.al. (2004)

Recognizing the success of microfinance initiatives, a number of governments/states have already institutionalized the system to its national agenda and policies such as in the Philippines. Such recognition also attests that in effect microfinance programs are crucial and contributory to the improvement of the lives of the poor. While government and donor agencies in the past have been contesting the concept of dole out supports, the popularization of the microfinance projects now address the aforementioned issue by simply making peoples’ and non-government organizations becoming self-sufficient and sustainable. So while microfinance programs address the needs of the poor, it also helps the financial capability of peoples’ and non-government organizations sustained.

In the Philippines, microfinance and micro credit projects have been considered social safety nets. Such concept refers to programs and projects that aimed to provide assistance mainly focusing on the poor segment of the population and other vulnerable populations. Social safety net, besides insurance and investments, also include microenterprise, which allows poor people to access loans.

In contrast to most commercial banks and financial institutions whose stringent requirements often discriminate poor people from borrowing money, the microfinance programs of the NGOs allow poor people to increase their purchasing power and to generate revenues through non-formal income generating enterprises or livelihood projects (Manasan, 2000) .

            In a report written for the Philippine Institute of Development Studies, the research arm of the country’s National Economic Development Authority agency, access to credit is an imperative instrument for poverty alleviation. As they stipulated, “it does not only provide the poor with capital for their livelihood, it can also help them in smoothing their consumption and income streams in times of crisis. Microcredit to the poor has come from two main sources: government-directed credit programs and private micro finance institutions.”

            While several doubts have been shed with regard to the methodological approaches employed by researches to measure the impacts of microfinance on poverty alleviation, the author of this terminal report is still convinced that microfinance indeed is an effective weapon to fight poverty. In fact, statistical reports and scientific inquiries have already been published recognizing the impacts of microfinance in helping the poor move out of poverty.

            Like the studies presented in literature review [e.g. Mainsah et. al. (2004), Pitt, Khandker, and Cartwright (2003, 1998), Fairley (1998), Hossain (1998), Khandler (2005), Dunn and Arbuckle (2001), Tood (1996), Alexander (2001), and Barnes, Gaile, and Kimbobo (2001) ], other quantitative studies [not mentioned in the review of literature] have indeed similarly showed the success of microfinancing in mathematical terms which will be discussed in the paragraphs below as evidences to corroborate the claims of the other studies previously mentioned in the literature review.

            For instance, the Grameen Bank has already put up a mechanism to measure the impacts of their programs on the lives of the poor using a ten-point indicator namely increase in income, improved house structure, access to water, access to education, access to loan, ownership of sanitary latrine, adequate clothing, ownership of mosquito nets, additional income, absence of hunger, and improved health conditions.

            With these indicators, the Grameen Bank has kept track the progress of their clients. In 2004, they presented a report showing the increase in the quality of lives of their clients (whose membership is 5 years and up). The results of their study as shown in the graph in the succeeding page indicated the continuous increase of members (in percentage) moving out poverty.

It should be noted that in 1997, only a little less than 20% of the borrowers improved their economic condition. Surprisingly to note, in 2004, more than 50% of the borrowers were able to move themselves out of poverty. Such statistics provided a full proof that in the process the poor can really make themselves move out of poverty when they are given an opportunity to do so such as in the case of Grameen Bank partner-clients.

The graph in the succeeding page exhibits the increase rate of poor Grameen Bank clients moving out of poverty from 1997-2004.

Source: Data taken from the report of Goldberg (2005) for Grameen Foundation

The study of Hossain (1998) as previously presented in the literature review also showed descriptive statistics to show the differential poverty rates amongst Grameen Bank member and non members. In his study, he found that compared to non-participants, that rate of Grameen Bank members classified as either moderately or extremely poor is relatively lower. His study results suggest that Grameen Bank members are relatively less poor as opposed to the non-members. See table below.

Source: Data taken from the report of Goldberg (2005) for Grameen Foundation

The study of Chen and Snodgrass (2001) as vividly described in the literature review section, also provided quantitative evidences to show how the microfinance program affected the lives of the poor in mathematical terms. Their study indicated that in terms of  household income, annual growth rate, and poverty rate, borrowers of the Grameen inspired SEWA bank favorably have better statistics as compared to savers and non-participants. See table below.

Source: Data taken from the report of Goldberg (2005) for Grameen Foundation

Interestingly, the impact assessment study done for SHARE India showed the upward mobility amongst their mature SHARE clients from being very poor to moderately poor and non poor. Their report showed how the microfinance project improved the status of their clients in terms of economic mobility. The table  below shows the results of their impact assessment. It is interesting to note that 38.4% of their clients were able to change their status from very poor to moderately poor. 17% of former very poor individuals lifted themselves and became non poor which is really a promising indicator. Moderately poor individuals made themselves non poor with a percentage of 20.8.

Source: Data taken from the report of Goldberg (2005) for Grameen Foundation

As already pointed out, there are already a number of studies that showed the direct impacts of microfinance on the economic well-being of the poor specifically in making themselves move out of poverty. However, impacts of microfinance is not only limited to the economic status of the poor but it also impacts their social and health well being.

            For example the study of Harshemi, Schuler and Riley (1006) contended that participation in microfinance programs increases empowerment amongst women.  This is also similar to the study conducted in Pakistan which also illustrated the empowerment effects of microfinance programs on women.

The study of Husain (1998) reported that members of a microfinance project he investigated had significantly higher rates of contraceptive use. The study of Dunford and Mk Nelly(1998) also showed that microfinancing has impacts on the nutrition status of children as more mothers significantly introduced breastfeeding and healthy food diet.

            While these impacts are not economic in nature, in the process these non-economic effects would also contribute to the economic and social well being of families involved in microfinancing projects. For instance, if one controls fertility, this will allow parents to send children to school and will provide fewer expenses in the household.  Empowerment also allows women to become enterprising so that it allows them to earn income despite husband’s resistance. Improvement in the health status of the family will also minimize expenses related to health. And healthy living will allow women and men to become productive individuals. Hence, improve their economic status.

            Critics also expressed skepticism regarding microfinancing because some similar programs implemented in various countries were unsuccessful because of non-payments of borrowers and because of corruption. But such issues are not indicators of whether or not microfinancing really addresses the concerns of the poor. Like any business organizations, organizational and administrative issues remain a constant, such as the issue confronting the governance of microfinance programs in the Grameen Bank. Negative issues should not discredit the fact that microfinance programs are indeed helping the poor move out from poverty.

            Another criticism that Grameen Bank received particularly from international institutions such as the World Bank, is the failure of the latter to ensure first that poor people are provided skills training and technology transfer before they are provided with loans and credits. Otherwise, there is an expressed fear that the poor may not be able to manage their finances resulting to non-payment of debts. However, Yunus responded saying that with the poor peoples’ innate skills and capabilities, they no longer need skills training. Further, he highlighted the fact that these people need money to help them start their own enterprise taking into consideration their natural niche.

            It was also difficult for Grameen Bank to acquire loans from commercial banks, even from their own Bangladesh Central Bank, because bankers’ fear that poor people may not be able to pay. Besides that, according to economic theory, it is rather not cost effective to allow poor people to loan because the administrative cost may even be higher than the cost that they are actually going to borrow.  With this challenge, the Grameen Bank is just lucky enough that they have networks to help them such as international funding agencies like the Ford Foundation and other influential officials closely related to Muhammad Yunus.

            Despite the criticisms faced the Grameen Bank, from less than 30 dollars since it formally started, the Bank now operates in millions and millions of dollars. Innovative as it is, the Bank is now enjoying its reputation of being the central laboratory for microfinance institutions elsewhere. In fact, a lot of microfinance institutions, send their representatives to Bangladesh to observe the Grameen Bank’s operation before they will start their own. Most notably, President Clinton was inspired to build his own when he was still a governor. Hillary Clinton is also an avid supporter of Grameen Bank. With such admiration, she actually paid a visit to Bangladesh to observe.

            According to the report my Mainsah et. al. (2004), the success of Grameen Bank can be looked at many angles. In terms of its objective of alleviating the poor from poverty, many of the bank’s clients indeed have improved their lives manifested by both tangible and intangible outcomes such as the increase in income, establishment of their enterprises, building of decent house structures, sending their children to school, and improving their social and health well being.

            In terms of administrative issues, the Grameen Bank was able to achieve its target collection. The bank has instituted a good mechanism and follow- through to ensure that clients are able to pay their debts on time. With such achievement despite the absence of collateral is laudable. With the ability of their clients to pay their debts on time is also a clear manifestation that indeed the poor have improved their economic status from being penniless to becoming enterprising.

            So how is Microfinancing different from other poverty alleviation programs? In many ways, the microfinancing projects are better off compared to other development projects which in the process even make the poor more poorer. Unlike conventional development projects which often promotes dependence and patronage (dependency theory), the microfinance program allows partners to become self reliant and independent. As such, it is a form of empowerment particularly amongst women.

            Instead of just providing food and shelter on an outright basis, encouraging poor people to borrow and and earn through microfinancing projects would allow them to look for their own food and to build their own houses without depending on external support which are not in many ways sustainable and long lasting.  As a famous saying amongst social development agriculturists, instead of giving poor people food, teach them how to make (to plant) food instead. Such adage is also similar to microfinancing, instead of encouraging people to become beggars, teach them to become capitalists  so that the effects will be lasting and sustainable.

CONCLUSION

Critics often argue that micro credit does not contribute to the economic development of a country. But identifying the basis of what constitute economic development remains a crucial question. Should economic development be measured in terms of per capita income, per capita consumption, gross national product, gross domestic product, or internal revenue and taxation?

If the basis of development be measured in terms of those economic terms, then microfinance, if particularly being run by a non-stock and non-profit organization such as Grameen bank, has no room for acknowledgment in the national economic agenda. While microfinance programs can be a competitor in a free market, its contributions is not in anyway counted in government statistics. With this, the macro economic impacts of microfinance amongst the poor may be difficult to measure.

But to answer the question whether microfinance really works in alleviating the poor from poverty, I certainly would say yes. Studies, both qualitative and quantitative, indeed show in many respects how the microfinance affected the lives of the poor. I have noted in the review of literature and my discussion how microfinancing has encouraged poor people particularly women in becoming social entrepreneurs, which in the process has increased their income, if not allowed them to earn income.

There are critics that questioned regarding the validity and reliability of the measures of impacts of microfinance, but it is without a doubt, that even in a microeconomic level, microfinance has indeed changed the lives of the poor, at least at the household level. Beyond the issue of money, the microfinancing programs had affected the quality of lives of the poor as simplified by their ability to improve their housing, to send their children to school, to build latrines, to access water, and more importantly to involve themselves in the nation building by participating in peoples’ and microcredit organizations, exercising their right to suffrage, and involving themselves in the free market economy through their livelihood projects.

Anecdotal evidences narrated how poor people improved their lives from practically without anything to having a roof to shelter them and an enterprise to sustain their living. Moreover, the Grameen Bank has made changes in the lives of the poor in many ways namely,

Converted the poor to become social entrepreneurs
Improved the quality of lives of the poor
Increased if not provided them income
Made organizations and communities self-reliant
Encouraged many organizations world wide to adopt microfinancing

The success of the microfinancing scheme of Grameen Bank is traceable to its essential features which include [1] the ownership is by the people and for the people, [2] the bank does not operate like commercial banks, as such no collateral is required, [3] culturally and sensitive to the needs of the poor, [4] less administrative cost since the bank does not operate with extravagance, [5] available international funding, [5] it operates using the concept of economies of scope [that is providing other services other than credits and loans], and [6] it works independent from the government.

REFERENCES

Alexander, G. (2001). An empirical analysis of microfinance: who are the clients? In N. Goldberg. Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA Publication Series.

Asian Development Bank (2004). Credit makes good business sense for poor women. ADB Review, January-February 2004.

Barnes, C. (2001). Microfinance program clients and impact: an assessment of Zambuko Trust, Zimbabwe. In N. Goldberg. Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA Publication Series.

Barnes, C., Gaile, G., and Kimbombo, R. (2001. Impact of three microfinance programs in Uganda. In N. Goldberg. Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA Publication Series.

Chen, M., and Snodgrass, D. (2001). Managing resources, activities, and risk in Urban India: the impact of SEWA Bank. In N. Goldberg. Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA Publication Series.

Conroy, J. (2003). The challenges of microfinancing in South East Asia. The Foundation for Development Cooperation. Singapore: Institute of South East Asian Studies.

Dunn, E., and Arbuckle, J. (2001). The impacts of microcredit: a case study from Peru. In N. Goldberg. Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA Publication Series.

Fairley, J. (1998). New strategies for microenterprise development: innovation, integration, and the trickle up approach. Journal of International Affairs, Fall 1998: 52, 1: ProQuest Social Science Journals, p. 339-350.

Goldberg, N. (2005). Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA Publication Series.

Hashemi, S., Schuler, S., and Riley, A. (1996) Rural credit programs and women’s empowerment in Bangladesh. In N. Goldberg. Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA Publication Series.

Hossain, M. (1988). Credit for the alleviation of rural poverty: the Grameen Bank Bangladesh. In N. Goldberg. Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA Publication Series.

Javier, E. (2005). Localizing organizations involved in natural resource management experience in the Philippines. South East Asia Policy Research Working Paper, No. 3

Khandker, S. (2005). Microfinance and poverty: evidence using panel data from Bangladesh. In N. Goldberg. Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA Publication Series.

Mainsah, E., Heuer, S., Kalra, A., and Zhang, Q. (2004). Grameen Bank: Taking Capitalism to the Poor. Chazen Web Journal of International Business. Spring 2004.

MkNelly, B., and Dunford, C. (1998). Impact of credit with education on mothers and their young children’s nutrition: Lower Pra Rural Bank Credit with Education Program in Ghana. In N. Goldberg. Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA Publication Series.

Manasan, R. (2000). Social safety nets in the Philippines: analysis and prospects. Manila: Institute for Development Studies.

The Ladder of Abundance Blog (2007). What is microfinancing? [on-line] Retrieved April 3, 2007 from www.laddersofabundanceblog.org

The Official Website of Grameen Bank. Grameen Bank services. [ on-line]         Retrieve April 9, 2007 from www.grameen-info.org.

Todd, H. (1996). Women at the Center. In N. Goldberg. Measuring the impact of microfinance: taking stock of what we know. Grameen Foundation USA Publication Series.

United Nations (1998). The power and limits of microfinancing. Development Update. United Nations Department of Public Information, S-0140 New York, New York.

Yunus, M. (2003). Bank to the poor: microlending and the battle against poverty. BBS Public Affairs. New York.

[1]              Group Foundation is an urban based NGO operating in Cagayan de Oro City, Philippines.

 

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