Reflection Paper: Community Strategies/Interventions on Microcredit/Microfinance

I find that indeed inequities befalling the poor can also be as covert as in the financial
system. The poor are structurally disadvantaged when it comes to the financial system wherein
those who are unbanked and economically constrained cannot easily avail of financial services
from traditional lending institutions given their lack of credibility and necessary documentation.
As such, they resort to borrowing from informal lenders instead for their immediate needs. This
means of credit usually comes with usurious interest charges that furthers their financial burden,
the effects of which tend to be cumulative. It is a vicious cycle wherein the poor are stuck in
what they call a “poverty trap” of the financial system. However, the financial institutions are
simply charging for the opportunity costs and time value of money for the cash they have
forgone on account of the borrower. As to the higher interest rates charged by credit that are
easily accessible to the poor, they are accounting also for the high credit and default risk and
lack of collateral in serving this particular demographic. In such a system that perpetuates
poverty, government intervention is needed to afford the poor some form of leverage to escape
this poverty trap to get a better chance at life and microfinancing is one way to extend leverage
to those of the low-income demographic.
Microfinance or microcredit is the financial service provided to low-income groups or
individuals. The microfinance market in the country is one that is robust, with a total loan
portfolio and capitalization already in the billions. In fact, large commercial financial institutions
have already joined in on this lucrative market. Microcredit is deemed to be overall beneficial to
the economy as it increases household spending and asset holding. However, for it to become
an effective means of poverty alleviation, greater microcredit provision must be geared towards
productive and entrepreneurial endeavors in order to result in increased household income than
towards consumption spending. Also, with the increased commercialization of this industry,
proper regulation and strong oversight must be in place to effectively deliver the
intended objective of microcredit which is for poverty alleviation, rather than for profit at
the expense of the poor.