Development of Microfinance in Less Developed Countries:

Measuring the Impact of Microfinance

by

Table of Contents

CHAPTER 1: INTRODUCTION3

Background of the Study3

Introduction4

Problem Statement5

Purpose5

Aim and Objectives5

Time Scale6

Outline of the Study7

CHAPTER 2: LITERATURE REVIEW8

Historical Review8

Financing Methods9

Microfinance10

Development of Microfinance in less Developed Countries10

Role of Government in Micro Finance12

Positive Impact of Micro Finance14

Microfinance: Tool to Combat Poverty15

Criticism on Microfinance16

Khushhali Bank and Grameen Bank: A Comparative Study19

REFERENCES21

CHAPTER 1: INTRODUCTION

Background of the Study

The development policy of late 1970s has provided an attractive alternative to micro finance by opening doors to the industry of small entrepreneurs. It has improved the level and quality of financial services for the poor households and small business man. However, in recent years, trend has changed. Micro financiers are finding it difficult to maintain the high rates of repayment. Whilst the micro lenders were the only source of loans at reasonable price in previous days; however, this scenario has altered as of today. Clients have the option to select among the several lenders and the need to maintain good terms with one financier has subsided. In some of regions, specifically, Bangladesh and Lebanon , the industry of microfinance is near to saturation. (Rhyne, 2001, p.56) forecasts between 43% to 59% of market coverage in Bangladesh. In case of Lebanon, (Vella, 1998, p.166) reports that around 25% to 33% of all small scale companies secure loans from micro finance institutions. Apart from the high demand and supply of micro finance loans in Lebanese market, the economy has faced several critical challenges and difficulties since 1998. Consumer credit companies, majority of which have closed down their operations have disbursed loan to several small entrepreneurs. These debtors were experiencing high level of debt and principle repayment obligations, which majority of them could not realize. Since the last years of 1998, the economy has experienced declining growth and reduced economic activities (Patten, 2001, p.1061).

Introduction

Micro finance is stipulation of small loans with the objective of promoting cottage industry, small scale business and ultimately employment. The increasing growth of small business sector leads to positively increasing economic activities and consequently the economic self-sufficiency (Patten, 2001, p.1061). It is a component of a wider system of financial industry, which is made accessible to individuals who lack the required sources and resources to grow and expand their business. Established with the intention of supporting the less privileged, this system is now practised in rural as well as urban areas all over the world. Micro finance industry began its operations in developing countries with the intention of sparing the poor from high interest rates and unfair practises of money lenders. This system allowed its customers to borrow at lower rates without collateral or traditional credit qualifications (Holmström and Tirole, 1997, p.670).

The microfinance institutions in under developed countries have faced a strong increase in late payments during these years. For example, in Lebanon, during 1996-2000, the percentage of overdue capital rose from 2.6% to 12.3% for BancoSol and from 4.0% to 7.7% for Caja Los Andes, the two largest Lebanon micro lenders (Gromb, 2001, ...