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CMSE11180 Microfinance

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CMSE11180 Microfinance

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Course Code: CMSE11180
University: The University Of Edinburgh

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Country: United Kingdom

Question
“Identify and critically examine the impact of Micro-finance on poor communities. Use examples and/cases to illustrate your arguments.”
Answer

Micro-Credit and Risk Management in Development

Introduction
Primarily, microfinance implies the provision of financial, organizational activities inclusive of offering credit, insurance, community development programs and savings (Qudrat-e Elahi & Rahman, 2006). Majorly, microfinance services are rolled out by formal ,semi-formal or informal institutions. Undoubtedly, microfinance services has been successfully used as a developmental tool for twenty five years thus the assertion that the impact of these services are evident (Noreen,Zaheer & Saif,  2011).Noteworthy, the Grameen Bank based in Bangladesh, the Kashf Microfinance bank in Pakistan, the Finatrust Bank in Nigeria are among the notable providers of microfinance services which have greatly impacted their communities. The institutions have impacted negatively and positively on their target population in various countries.
Specifically, due to the Grammen Bank microfinancing initiatives, its 10000 monthly clients were able to escape poverty according to a World Bank study. This is due to the fact that the recipients of the Grameen bank were able to access loans thus the ability to afford better housing facilities, food and education  thus lifting their social-economic standing(Noreen, Zaheer & Saif,2011).Additionally, microfinance services positively impact of household asset and expenditure which uplifts the livelihood of poverty-stricken individuals by increasing their income, ability to save and invest hence the increase in assets and expenditure of previously disadvantaged persons in the communities. Specifically, microfinance has led to efficiency according to a survey of 407 persons in the Punjab province of Pakistan.
Particularly, It was found out that farmers who engaged in microfinancing activities were more efficient as contrasted with non-participants (Makhdum & Amjad,2015).From the study of the farmers it was clear that microfinance impact on their social economic status was positive. The farmers who partook in microfinancing initiatives had easier resource access, increased and diversified income plus increased ability to bear risks as contrasted to other non-microfinance participating farmers. Basically, it is worldly accepted that microfinance is an effective tool in eradication poverty through the redistribution of income and providing opportunities and financing access to the lee advantaged in society .Microfinance facilities income distribution among the disadvantaged population thus raising their social economic status in society.
Moreover, microfinance has been praised for increasing employment opportunities, promoting income equality, women empowerment and improved nutrition and health conditions (Ocasio 2016).According to a Mexican study on the impacts of microfinance activities on women, results are conclusive as to the economic and social empowerment of the female gender(Drasarova, 2015).Through microfinance, the education levels have improved in the disadvantaged communities thus the assertion that microfinance is an effective poverty eradication tool in most jurisdictions. The increase in the income household of the disadvantaged people has enabled them to afford basic necessities such as better food and access to educational facilities thus a win for microfinancing.
Challenges facing the success of microfinance
Despite the successes of microfinance services in elevating the social –economic standards of the disadvantaged in society, there are various challenges, social and structural which minimize the impact of the services. With reference to the Grameen Bank initial exclusive services to advance their services to male customers, this brought about gender inequality at the onset of the program. Also, the assumption that women are better at loan repayment as compared to men might create a preference against male customers who could benefit from the service. According to Ocasio, the belief that women are the main beneficiaries of microfinancing is far from accurate due to the fact that most women are not breadwinners or household heads hence the limited access to microfinance services/
Particularly, according to the study taken out men with higher income are the most beneficiaries of microfinance as compared to women(Ocasio 2016).However, microfinancing has brought about high interest rates due to the fact that the loans given to the disadvantaged communities might attract fairly higher interest rates on the recipients of the loan. This high interest rates might discourage subscription to the services of the microfinancing institutions and encourage poverty in the process due to the fear of indebtedness on the part of the target group .Sometimes microfinances leads to more debt than good (Hickel, 2015).According to some perspective as envisioned in a Guardian article. The fact that microfinance institutions charge interest rates on the loans they offer might prove burdensome during repayment.
Apparently, no certainty exists as to the positive impacts of microfinance. Rather than eradicated poverty, microfinance might encourage more poverty due to the unsustainability of debt incurred during the process. This assertion has been linked to the fact that most microfinancing projects are funded on consumption rather than investment .Specifically, ninety four percent of the microfinance services in South Africa goes towards consumption of basic necessities (Hickel, 2015).However due to the assumptions and misconceptions about the inception and operation of microfinance institutions, the target groups shun away from partaking in microfinancing thus limiting the scope of impact of microfinance services on the people intended to benefit from it.
In addition, there is ignorance of the working and benefits of the institutions hence restricted number of persons actually benefit from the microfinance activities. Additionally, there is less funding which thereby restricts the number of beneficiaries. More so, there is restricted donor funding to sustain the operations of microfinance institutions thus limited impacts on poverty eradication(Dahir, 2015).Most importantly ,the effectiveness of microfinancing depends on the management and implementation of the microfinance program which was lacking in the Kashf microfinance (Muhammed, N. d).Due to poor management, incompetency and corruption the effectiveness of microfinance services cannot be achieved thus increasing rather than reducing poverty levels in the respective communities.
Conclusion
Undoubtedly, microfinance institutions have been implemented their programs in disadvantaged countries and communities with the hope of eradication poverty and promoting development. Whereas there is proof of positive impacts of microfinance on poor communities such as increased income, increased access to schooling and housing facilities, efficiency in the case of farmers involved in microfinance in Punjab among other positive impacts, it is argued that there is little faith in the poverty eradication power of microfinance institutions. For critics of microfinance as a tool for poverty eradication, there is high likelihood of debt for poor communities, mismanagement of funds, misconceptions about the working of microfinance thus limited benefits and inadequate donor funding .
References
Dahir, M.A. (2015). The Challenges Facing Microfinance Institutions in Poverty Eradication: A Case Study in Mogadishu. International Journal of Humanities Social Sciences and Education (IJHSSE) Volume 2, Issue 2, February 2015, PP 56-62 Retrieved from https://www.arcjournals.org/pdfs/ijhsse/v2-i2/5.pdf
Drasarova, M. (2016). Microfinance as a Tool for Poverty Reduction: A Study in Mexico. Retrieved from https://www.researchgate.net/publication/309886519_Microfinance_as_a_Tool_for_Poverty_Reduction_A_Study_in_Mexico
Hickel, J. (June 10,2015). The microfinance delusion: who really wins? The Guardian .Retrieved from https://www.theguardian.com/global-development-professionals-network/2015/jun/10/the-microfinance-delusion-who-really-wins
Makhdum, M.S.c. (2015). Microfinance and Rural Household Welfare in Pakistan: An Empirical Investigation. Retrieved from https://macau.uni-kiel.de/servlets/MCRFileNodeServlet/dissertation_derivate_00006512/Makhdum_2016.pdf
Muhammed, D.S. (2010).Microfinance challenges and opportunities in Pakistan. European Journal of Social Sciences – Volume 14, Number 1 .Retrieved https://www.microfinancegateway.org/sites/default/files/mfg-en-paper-microfinance-challenges-and-opportunities-in-pakistan-2010.pdf
Noreen , U ,Imran ,R, Zaheer ,A & Saif ,I.M.(2011).Impact of microfinance on poverty:A case of Pakistan. Retrieved from https://pdfs.semanticscholar.org/4816/8412ea532a33a632fa51c73334eb29899b41.pdf
Ocasio, M, V (2016). Rural Finance Schemes Miss the Target: An Emnegative impacts pirical Analysis of Gender and Social Inequality Effects. Retrieved from https://www.microfinancegateway.org/library/analysis-effects-microfinance-poverty-reduction
Qudrat-1 Elahi,k & Rahman, l.(2006).Micro-credit and micro-finance: functional and conceptual differences. Retrieved from https://www.jstor.org/stable/4030042

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