A SOLUTION TO SUPPORT TO THE LOW INCOME SOCIETIES

Micro-finance: A Possible Solution to Support to the Low Income Segment of Societies



Micro-finance: A Possible Solution to Support to the Low Income Segment of Societies

Chapter 4: Findings & discussion

Microfinance is still a relatively new idea in the financial services market, but it is fast emerging as an integral part of development plans in many countries. The literature available is spread over many paths such as; social science, political science and all walks of finance. It is important to keep an open mind when researching the material written on microfinance. There are two contrasting views on microfinance. Some authors believes that microfinance, if developed and used properly could offer a feasible answer to many of the financial problems facing those in the underdeveloped and developing worlds; “Microfinance is the provision of financial services to low-income, poor, and very poor self-employed people. From its inception in the 1970s, microfinance has evolved in astounding ways, incorporating into its practice social and economic development concepts, as well as principals that underlie financial and commercial markets. This combination has led to the creation of a growing number of sustainable microfinance institutions around the developing world”.(Otero, 1999:8)These institutions have reached over 120 million people who were living under the poverty line and have given them a chance of a better standard of living. MFOs are willing to lend where governments and commercial institutions shy away. Its potential was recognised and now those commercial institutions that initially shied away have acknowledged the scale of the industry and the potential profits to be made.

Microfinance addresses the main constraint faced by the poor; their shortage of material capital (i.e. the input necessary to generate income). Microfinance Organisations provide not only the material capital in the form of credit, savings, insurance and fund transfers but also provides the human capital necessary (education and vocational training), in order for clients to better their own financial situations (Otero, 1999).

This is where MFOs differ from commercial banks. MFOs train clients on how best to invest their credit and encourage them to save with the organisation. This vested interest enabled both the organisation and the client to grow and benefit. Yunus was one of the first to adopt this style of lending; he also went against traditional lending practice by lending in majority to women. As detailed earlier, nearly 97% of Grameen Bank's borrowers are women. There are many reasons behind adopting such a lending policy;-The default rate of women in comparison to men was considerably lower. An IFPRI study in 1997, for example, shows that Bangladeshi groups with a higher proportion of women has significantly better repayment dates (IFPRI, 2008).

-Women are more likely to use the money to better the household as a whole and thus improving their standard of living. Repaying on time creates a good credit history and enables them to borrow more at lower rates.

-Women rarely use all their loans for one activity - they spread the risks between activities which generate ...