Microfinance has become one of the most viable solutions to highest poverty rates among developing economies. It is also world’s most funded intervention due to the possibility to receive micro loans and discover wider opportunities for the poorest people of the world. Despite the promising perspectives, microfinance experienced a serious criticism by 2010.
Specifically, the research studies and global reports started challenging the benefits of microfinance, comparing with the collapse of subprime mortgage reform in the United States (Chang n. p.). Dramatic interest rates and cases of suicide among Indian borrowers introduced a negative side of the microcredit opportunity (Chang n. p.).
The quantitative evidence suggests that the nature, balance, and magnitude of finance are inconclusive and ambiguous. Although microfinance has been considered an effective tool for dealing with poverty, no evident data has been provided to support its positive effect, which leads to misconceptions about the actual effects of the projects and distracts researchers from introducing new solutions and reforms (Duvendack et al. 9).
Therefore, the policy makers are fully aware of the actual underpinning for microfinance project development because it is impossible to introduce consistency to the world economy in case only one dimension is tackled.
The genuine intent of introducing microfinance reforms was justified because the possibility to borrow money has lead to increase in self-employment and access to credit money. However, the research on microcredit initiatives in Bosnia has discovered tangible augmentation of child labor rates in small businesses that have been created on the basis of microloans.
As a result, the concerns emerge due to the unpredicted outcomes of wider access to loans (Chang n. p.). Other consequences do not contribute to improvement of needs of the poor population in the world because the proliferation of small business has increased the competition and created new challenges for larger global companies and corporations.
Despite this serious problem, microfinance should not be fully abolished due to the benefits that other microfinance services propose to people. This is of particular concern to insurance and savings. Certainly, offering microloans to the poorest people will not solve the problem of the third world. Nevertheless, it is a considerable step toward harmonization of the global economy.
As result, microfinance fails to solve a compelling problem of poverty in the world due to certain reasons. Before introducing microcredit services, the government should develop a strict regulation according to which small businesses should be controlled to avoid such challenges as child labor and self-employment.
The emergence of microfinance project does not have a positive impact on efficient allocation of resources, leading to decreased sustainability. The private segment is discouraged by microfinance policy because of the high risks it creates for small business.
Specific attention require transaction costs for receiving data on the creditworthiness of clients, high rates of mortality among small enterprises, as well as inconsistencies in the information obtained from banks and borrowers. All these concerns underscore the failure of achieving profitability in the poor regions of the world.
The majority of microfinance projects are organized through public funds and there are financial institutions that achieve large ratio of poor clients that require donor transfers to finance their expenditures. These transactions are reasonable provided the funding process is introduced on a long-term basis.
As a result, “unsustainable microfinance organizations tend to inflict costs on the poor in the future far greater than the gains enjoyed by the poor in the present” (7). At this point, financing the poor is a daunting task because this group usually resides in remote areas without main institutional infrastructure.
Moreover, due to the fact that there are billions of the poor in the world, the efficiency and availability of these financial services should be approved for longer periods of time to insure their self-reliance.
Some of the money borrowed is not used effectively due to the lack of education and awareness that are provided in developed economies. Hence, before implementing this service, specific attention should be given to the reforms that would strengthen social and economic infrastructures in the areas at issue.
The mainstream of microfinance is based on the current banking infrastructure that has led to the necessity for creating a new institution offering an independent regulatory framework. Financial resources are withdrawn from banking channels. Hence, the challenges associated with control and regulation of microfinance institutions, as well as the public deposits and reliance on grant funding has been eliminated.
Additionally, the microfinance is considered as a tool for development and innovative policy that will allow the poor economies to advance their profits and introduce new powerful financial institutions. More importantly, a microfinance environment has emerged as an innovation to the world. It has evolved into an advanced system of financial services offered to the poor population, particularly to micro-enterprises.
Over the last two decades, a range of microfinance technologies has been advanced that specifically refer to financial services suggesting deposits and credits. The technological support provided for microfinance services creates for farming in rural areas, which opens new opportunities for small entrepreneurs.
The services have been expanded through the introduction of the Asian Development Bank that offers such services as loans, deposits, payment services, insurance, low-income households.
Emergence of new services has encouraged new customers among the poor groups and those who were previously limited in their access to microloans. However, a tangible shift has occurred with the emergence of ACCION, an American non-governmental organization that operates in Latin America.
The network focuses on financial operations in Bolivia aimed at developing a specialized bank that can advance the economic situation in the country. The process of commercialization became evident because the public sector forwarded new funds, being the biggest promoters of financial services. Furthermore, a new microfinance network has emerged in Germany and is called ProCredit (Mathheaus-Maier and von Pischke 2).
This institution has attracted many foreign investors who were interested in financing developing economies. The main objective of this organization focuses on the syntheses developed by operational format that are structured in the form of private and public partnership.
According to Mathheaus-Maier and von Pischke “the powerful vision of microfinance as mainstream finance fulfilled the dreams and passions of economists and political economists who, since 1970, had advocated financial market liberalization” (2). At this point, microfinance searches for new ways and opportunities to produce welfare to the developing economies.
So, it is possible to highlight three institutional strategies that associate with the governmental commitment to improve the quality of living in the poor regions of the world. The first strategy implies the development of mission stability, which is composed of an ongoing provision of a variety of financial services to the target group.
Second, mission enforcement is another approach according to which new services and new groups have been introduced along with the previously existing groups. The third possibility is associated with mission drift that focuses on the institutions moving to upper markets and abandoning the poor. The shifts take place when the institution ownership has been changed.
Encouraging strong customer protection strategies and developing efficient measure of transparency can be foundational for industry success and high social performance.
For promoting and strengthening the defined efforts, the emphasis has been placed on three aspects of the microfinance industry: MicroFinance Transparency, the Smart Campaign, and the Social Performance Task Force (The Microfinance CEO Working Group n. p.).
To contribute to their success, each of the proposed initiatives will be effected to meet the highest requirements and goals. To begin with, the Smart Campaign “…supports institutions as they ensure that they treat clients fairly and respectfully, and avoid the harm that improper use of financial products can sometimes cause” (The Microfinance CEO Working Group n. p.).
At this point, the networks assist the microfinance industry in integrating Client Protection Principles into all practices. MicroFinance Transparency relies on advancing microfinance to a new pricing strategy.
It has been reported about pricing opportunities by 317 institutions representing over 36 million customer loans in 12 countries (The Microfinance CEO Working Group n. p.). Finally, the Social Performance Task Force suggests that more than thousand stakeholders strive to work out common principles for estimating social performance.
Social welfare is the key goal that microfinance policy makers should observe. It also directs at increasing economic growth and developing greater access to new financial resources and solutions. Certainly, poorer people living in urban districts will except to receive financial benefits within much longer terms due to their geographic position.
Engaging these regions into the economic mainstream, therefore, is significant for insuring sufficient growth and developing high sustainability level of social development. More importantly, “…by delivering financial services to people in rural areas and lower income strata can they be brought within the ambit of economic activity” (Mathheaus-Maier and von Pischke 85).
Due to the fact that the rural sector requires the highest attention and financial support, this sector could also offer a promising perspective for developing small business as soon as the corresponding financial investments are made. As a proof, India could be considered one of those regions that are in high demand of microfinance.
As a result of financial activities, such changes as “land redistribution, building economic and political awareness, technology transfer and deliver of a variety of services” took place in the region (Mathheaus-Maier and von Pischke 86). With regard to the Indian experience, microfinance has a potent impact on economic development of small and middle business ventures.
From a historical perspective, governments have resorted to credit system to transfer various resources to the identified populations. The negative consequence of these schemes lied in creating many experts and investors supporting national governments and making them to withdraw this policy.
The problem is that such an approach does not always produce the desired outcomes because some governmental projects undermine the benefit of microfinance markets (Khawari 17).
Yet, the problem that state authorities play an essential role in creating a viable financial system that seeks to increase economic and social welfare of low-income population. Experienced investors can support the authorities for introducing a strong ideological framework that focuses on competitive microfinance.
While referring to the Indian case, which reflects the consequences of governmental policies for the poor economic sector, similar constraints have emerged in Haiti when opposite views were held by authorities (Mathheaus-Maier and Von Pischke 87). Both Haitian and Indian Parliaments are searching for new regulations that can control microfinance and eliminate the previously stated challenges.
In general, microfinance is an option which allows the economies to accelerate the process of crediting in two-fold manner – providing adequate support for financial activities and household income, as well as distributing responsibilities for the mainstream economic sector and the government.
Currently, developing economies constitute strong potential for enhancing the politics of microfinance, which will later contribute to advancement of the global economy in general.
In order to sustain the economic growth, it is essential to develop the corresponding financial skills in the financial institutions, as well as establish connections with equity and debt markets. As soon as these aspects are considered, microfinance can make a valuable contribution to transforming rural areas into the source of economic prosperity.
On the one hand, the policy of microfinance has a positive outcome on poor economic regions in developing countries. Small business owners have received a marvelous opportunity to invest into their capital market and advance their financial power. However, most of the loans taken by the poor were not received in time and, as a result, entrepreneurs suffered from debts.
On the other hand, microfinance initiatives have been beneficial for the microcredit banks that can increase their profits tremendously. In both cases, there are advantages and disadvantages leading to serious consequences for several reasons. The policy would be more efficient in case the government conducted a thorough examination of the areas in which the policy was planned to be implemented.
The research should focus primarily on income level, business opportunities, and availability of resources. As soon as these surveys have been conducted, they should be integrated into the newly established financial institutions proposing microfinance services.
Microfinance initiative has been a tangible contribution to the problem of high poverty rates in the developing regions of the world. Despite a great number of disadvantages, the very idea of arranging specialized banking institutions offering financial services to small businesses is approved because it provide wider access for entrepreneurs living in remote areas.
However, receiving investment is not enough to putting money into the right course. People who are involved into business activities should be aware of the major economic and financial processes that take place at an international level to be able to grasp a specific market and create a competitive advantage.
The outcomes of the policy are predominantly negative because most of the evidence does not point to the success of the venture for low-income individuals. The majority of the participants of the project encouraged the introduction of the reform, but further consequences have provided the desirable outcome.
Nevertheless, the rehabilitation of the microfinance process could still be possible as soon as all the above-presented issues are tackled carefully. The attention should be given to the analysis of the rural environment and geographical distance areas. Introducing financial institutions in these regions could facilitate the economic growth.
Chang, H. J. The Rise and Fall of Microfinance. The Guardian. 2012. Web.
Duvendack M., Palmer-Jones R., Copestake J., Hooper L., Loke Y., and N. Richard Evidence of the Impact of Microfinance: A Systematic Review. 2011. Web.
Khawari, A. “Does it hold its promises? A survey of recent literature”. HWWA Discussion Paper. 2004. Web.
Mathheaus-Maier, I. and J. D. Von-Pischke. New Partnership for Innovation in Microfinance. US: Springer, 2008. Print.
Satish, P. “Mainstreaming of Indian Microfinance”. Economic and Political Weekly. 40.17 (2005): 1731-1739. Print.
The Microfinance CEO Working Group “Road Map for the Microfinance Industry: Focusing on Responsible and Client-Centered Microfinance”. Opportunity International. 2012. Web.