Microfinance - Important Role in Economic Growth

Chaitanya Shah
Jun 2011 Page 1 of 3

In a world where almost half the population lives in poverty, microfinance is

one of the better tools for poverty alleviation, economic growth and
development in emerging economies. These loans offer the same benefits to
major world economies that face growth problems. It is very well realized that
these loans can help lower-income groups setup and grow the small
businesses, which generate income and employment that helps their
communities and their economies.

Currently, microfinance services (loans, savings, etc.) are available to over

100 million of the world's poorest families (Micro credit Summit Report,
2009). That may partially explain the decline in poverty rates over the last
three decades. In fact, 5% of the clients of Grameen Banks pull themselves
out of poverty each year thanks to loans and most of ACCION USA's
microfinance clients created 2.4 jobs during 2008, when many businesses
were downsizing.

What is microfinance?

Microfinance includes basic financial services - including small loans, savings

accounts, fund transfers and insurance. Alongside non-financial services such
as business training, microfinance assists people living in poverty who
wouldn't usually qualify for regular banking services because they have no
form of collateral or formal identification.

Loans as small as Rs.5,000 and help people in poverty either to start or grow
their own small business. This enables them to earn an income so they can
afford food, clean water, proper shelter and an education for their children.

Here's how it works...

There is a lot of hype surrounding microfinance. For some, microfinance is an

effective tool used to promote large-scale poverty alleviation. For others, it is
simply considered a way for moderately poor iniduals to better their own
situations. Statistics have shown that overwhelmingly (above 95%) of the
entrepreneurs, who have availed microfinance interviewed reported that their
loan had a positive impact on both their personal and professional lives. That
is certainly something to be proud of.
Microfinance - Important Role in Economic Growth
Chaitanya Shah
Jun 2011 Page 2 of 3

Importance of Microfinance

Internationally it has been recognized that excellent work has been

accomplished through a new collaboration of NGOs, corporates and
government in the areas of Micro Finance.

Poverty reduction through growth requires a focus on the indigenous private

sector, which in economically under developeed countires is composed of a
myriad of micro, small and medium enterprises . . . they are the primary
source of jobs and economic opportunities. Access to credit and other
financial services is important to growth and investment, yet few small
businesses or iniduals are able to get the access they need.

Micro-finance institutions (MFIs) . . . have grown under the pioneering work of

nongovernment organisations. But much more needs to be done in this area."

At the United Nations General Assembly in September last year, 151 Heads of
State from around the world had gathered to eview the progress in reaching
the millennium development goals to eradicate extreme poverty by 2015.
One of the major conclusions at the summit was that microfinance is one of
the most significant ways.

A study of borrowers on the island of Lombok in Indonesia reports that the

average incomes of clients increased by 112 per cent., and that 90 per cent.
of households moved out of poverty. All over the world, one of the first things
that poor people do with new income from micro-enterprise is to invest in
their children's education. They have shown that poor people are good credit
risks and that cost-effective techniques to provide financial services can be
developed to offer them long-term sustainable growth.

Microcredit programmes have generally targeted women as clients (It has

been estimated that eight out of every 10 microfinance clients are women)
because women's performance on repayment often proves to be better than
men's. They are also more likely to invest increased income in the household
and in the family's well-being. Most important, microcredit can empower
women to become more assertive, which is a good thing. Women are then
more likely to participate in family and community decisions. The women's
empowerment programme in Nepal found that 68 per cent. of its members
were making decisions on buying and selling property, sending their
daughters to school, negotiating their children's marriages and planning their
families-all decisions that have traditionally been made by husbands.

One needs to focus on the importance of microfinance in alleviating poverty

and meeting the millennium development goals. There is still a significant
belief among NGOs that Governments are not supporting microfinance to the
extent that they could.

There are concerns about commercialisation. The move towards

strengthening the financial sector as a whole increasingly brings international

and commercial banks into microfinance, what Professor Muhammad Yunus

from the Grameen bank feels. He is one of the great microfinance innovators
and his inspiration led to the bank's creation.

One of the important issues is to gather good data about the poor people's
access to financial services, so that inadequate data will soon cease to be a
factor in the slowness of the spread of microfinance. CGAP, a World Bankhosted, multi-donor initiative to increase access to financial services to poor
people, has estimated that some 2 billion low-income people in the
developing world still do not have access to bank accounts or financial
services.

Whether we should broaden and develop the financial sector or support

microfinance institutions is not an either / or question, as both have a role to
play in increasing access for the poorest to financial services. The country
that stands out as a beacon in terms of access to microfinance and that
demonstrates its potential is Bangladesh. Perhaps that is because of the
power and inspiration of Professor Yunus and the Grameen bank. We need to
continue to remind people of the success that has been achieved in
Bangladesh and to urge all donors.

The concept has been gathering momentum in India too; however, we have a
great ground to be covered. Let us hope that our policy makers will take early
actions so as to improve the meaning of life for people who are below poverty
line.