IS MICROFINANCE A FASHION OR SOMETHING MORE

SUBSTANTIAL?
One fifth of the world population totalling about one
billion people earn below $1 per day (UNDP 2000,
Grameen foundation, 2002) these people are referred
to as being poor, studies have also shown that these
poor people are either self employed or working in the
informal sector of the economy. This has become a
global issue that the world bank set it major goal as
elimination of poverty (World Bank, 2004) also the first
Millennium Development Goal set at the United Nation
Summit in 2000 was the eradication of extreme poverty
and hunger with a target of reducing the number of
people living below $1 per day by half (UNDP, 2000)
Around 70% to 80% of world population does not have
access to the simplest financial service (Janine,2007),
yet the poor according to Prof. Muhammad Yunus need
finance to either invest in a business or improve the
already existing one to meet their daily needs such as
food, shelter, clothing, education and a little bit of
savings to take care of unforeseen circumstances, as
investment will fetch, There existed sources where the
poor access microcredit such as the few wealthy in
their communities, savings collectors and co-operative
societies, self-help groups and sometimes
governments of countries through Non Governmental
Organisations (NGOs) (Mario La Torre, 2006) but they
are either expensive, risky or very ineffective, flexible
to meet their needs. Conventional commercial banks
are no go area because of the requirements and stiff
conditions. (Elizabeth Littlefield, 2004).
Microcredit was gradually taken over by modern
microfinance activities became necessary basically as a
result of improved financial needs of beneficiaries, such
as savings advisory and insurance to name a few
(Mario La Torre, helme, 2006) other reasons being
shortcomings of microcredit and the need for donors
reduce their exposure to credit risk and take care of
intermediation costs by way of profit. The first formal
microfinance institution was established in Bangladesh
by Prof. Muhammad Yunus in 1983 after a post-war
credit experimental programme administered to
women bamboo furniture maker in 1978. The bank
today has well over 3.5 million customers in almost
36,000 villages.
Yunus’ vision has been adopted by almost all the
countries of the world, little wonder why the Nobel
Peace Prize went to Muhammad Yunus and Grameen
Bank in 2006.
MFIs’ tremendous growth over the years can be traced
to the support of various international agencies,
governments and NGOs, this is so because of the
perceived as an effective tool in poverty alleviation
(Manohar, 2000) by providing fund to the poor in order
to seize business opportunities or expand existing ones
to cater for their immediate needs like food, children
education, health and to also save for future.
The remaining sections consider the nature of
microfinance institutions their contributed to poverty
alleviation, challenges and conclusion.

Microfinance Institutions (MFIs)

Microfinance (MF) has been defined by the Microloan
Foundation as
the provision of financial services to who are excluded
from conventional commercial financial services since
most are too poor to offer much or anything in the way
of collateral, whereas a to the Wikipedia encyclopaedia
described it in a broader way as the provision of
financial services to low income clients including
consumers and the self employed who traditionally lack
access banking and related services. It is clear that
microfinance is basically meant and designed for low
income earners who cannot meet commercially banks’
requirements in accessing loans.

Microfinance institutions (MFIs) can be described as

financial institutions providing financial services to the
poor and the unbanked that do not have access to
conventional banking facilities. MFIs are either formal,
semi formal or informal (CGPA,2000, Mario La Torre
2006). The formal MFIs belong to the class of Non Bank
Financial Institutions (NBFIs) they are registered and
subjected to the banking regulations of the country in
which they exist, the semi-formal are also registered
but are rather subjected to normal commercial laws of
the country. Informal MFIs are neither registered nor
regulated operating in form of a Rotating Savings and
Credit Associations (ROSCA).MFIs are either
government owned, group owned, NGOs or profit
maximising shareholders or self-help groups in the case
of informal MFIs. They are usually smaller in size
compared to normal commercial banks and have a
limited range of products. MFIs loans are easily
accessible as little or no collateral is required.

Microfinance and poverty Alleviation

Individual, groups and institutions have tried to assess
the effect of access to financial services on poverty
level. There have been challenges in doing this partly
because microfinance has multiple effects on poverty
and sometimes not immediate, it also varies from
individual and household.
Despite the challenges several studies have been able
to assess these impacts as regard social and economic
welfare of individuals and household as regards
increased income level, consumption rate, school
enrolment, and woman empowerment.
MF has increased clients’ income by an appreciable
level; this is because clients seize business
opportunities that come their way as result of easy
access to cheap funds. One of the major impact
assessment carried out was by Mahabub Hossain in
1988. Hossain tried to compare the income level of
Grameen Bank clients with that of non clients who
either did not partake in the credit or did not have
access to credit because Grameen was not in their
village. Result showed that Grameen clients’ average
income was 43% more than that of people who don’t
have access to Grameen and 28% more than non-
participating client. Martha Chen and Donald Snodgrass
in 2001, compared the level of income of clients and
non clients of SEWA bank, one of the oldest and largest
MFIs, credit clients, income was 56% more than non-
clients and 25% more than savings clients i.e. those
who save but do not borrow. Another study by
Elizabeth Dunn and J. Gordon Arbuckle Jr., using Peru as
a case study shows that a MFI client earn $266 per
annum more than a non client.
Studies have also shown that MFIs have impacted child
education. Holveot (2004) evaluated the impact of MFIs
on child education in India using two MFIs as a case
study his finding was that the number clients children
in school especially girls was more than non-clients.
Khandler and Pitt’s research also indicated that credit
to women by Grameen bank and Bangladesh Rural
Development Board (BRDB) BD-12 had a great impact
on children schooling but boys in this case. Another
impact study of UNDP funded MFIs in Africa also show
that majority of clients in Nigeria, Malawi and Kenya
were able to send their children to school (UNCDF,
2004:14).
Larger percentage of poor people are women, studies
have also shown that they form the highest percentage
of microfinance borrowers. Majority of these borrowers
have been empowered economically, to take care of
family domestic needs such as school fees, medicine
and asset acquisition (Khandler. 1998). An impact
assessment in Bolivia showed that 67% of women who
are MFIs clients spend their income on medication,
clothing and food (Nelly Dunford, 1999). Economic
empower also reduced domestic violence by their
spouse resulting from poverty and hunger. Impact
evaluation of theNorth West Microfinance Expansion
Project and CEP showed that it has helped in reduction
of domestic violence and increased their confidence at
home and in community. (CEP 2006, Barua 2007).

MFIs have also reduced the vulnerability of their clients

to risk of business or personal losses through savings
and also achieve household objectives such as
payment of children school fees, hospital bills in case of
illness. It also gives them opportunity to access more
loan and in some cases in place of loan where the
return of a particular business opportunity does not
seem to be too profitable to qualify for loan. On the
other hand clients’ it will help MFIs to stabilise their
liquidity and by extension improve their profitability.
Studies also show clients in the rural area save in order
to acquire household equipments like television set
radio, refrigerator and sometimes landed properties.

Microfinance has also proven to be a good recovery tool

in case of disaster (UNDP) , (World Bank 2002) it afford
families who are survivors of conflicts or wars easy
access to fund to take care of their domestic post-war
need and n start up a new business to take care of their
future needs. That was the case of Prizma in Bosnia
post war in 1997.
Generally speaking, microfinance has given who were
once poor and felt neglected a sense of belonging,
integrity and respect in their families and communities.
On integrity, Her Majesty the Rania Al-Abdullah of the
Hashemite Kingdom of Jordan Emissary for the
International Year of Microcredit, 2005 was quoted to
have read thus:
“For many years now, I have been impressed by the
power of a simple small loan to those whom fate and
circumstances have resulted in disadvantage.
Maintaining people’s integrity and showing them trust,
whilst facilitating a way for them to rebuild their own
lives in such a meaningful way of alleviating poverty”.
(Benoit et al cited 2007 p. 3).

These achievements of microfinance could be linked to

poor people’s willingness; especially women to repay
their loans and pay interest on them to enable MFIs
sustain themselves and extend facilities to others
willing to take loans.
Although microfinance industry grows at between 15%
and 30% annually over the last two decades and it is
estimated that the average loan outstanding to their
clients stands at about $30 billion (CGPA) there still
exists a wide gap between achievement and demand
which is estimated at $1000billion (CGAP, MIX,
Microcredit Summit 1996). In order to meet this
demand, there are challenges that needs to be
eradicated

The major challenge faced by microfinance is the

bridging of gap between it demand and supply. To do
these various smaller obstacles need to be addressed.
An abstacle to effectiveness of microfinance is the
ownership structure of MFIs; most of tem are owned by
NGOs or group of individuals or associations whose
objective is to better the lot of the poor. They
sometimes possess little or no managerial skills to
manage an organisation as regards risks, internal
control, staffing and customer service (Anita, 2001).

MFIs operate under poor regulatory framework.

Government make rules pertaining to capital
requirement, interest rate ceiling, type of services and
ability to mobilise savings. MFIs’ minimum capital
requirements are either too small to sustain the
institution or too high for new investors to meet.
Though some MFIs are registered NBFI but they are still
restricted from accessing financial market to source
fund in order to manage their liquidity thereby
exposing them to risk. More so interest rates are fixed
by the government. MFIs capital requirement should be
such that new investors will be enticed and existing
ones can be sustained, they should also be allowed to
source fund from the capital market in order to finance
their portfolio extend to other poor people.
Modern MFIs also lack technological infrastructures.
Majority of them still keep customers record in hand
written books and journals, customers’ credit check are
still done manually. Manual operations, according to
Janine (2007) increases operation cost. Modern
technology reduces the time and resources spent on
transactions and by extension reduce transaction cost.
MFIs also need to identify their clients according to
their needs through research and studies in order to
meet those needs as poor people need more than cash
to survive.

Human capital management is also an issue in

microfinance. Recent study show that majority of MFIs
officials do not employ qualified officials, they do not
train them to understand clients background in order to
meet their individual needs and thus have high staff
turnover because they do not want to incur a high staff
cost. the effect of this is that staff will not be able to
understand and meet clients individual needs, high
staff turnover will also lead to extra cost of recruitment.
Clients also pose problems for MFIs as some of them do
not have assets as collateral or employment history,
those who have access to loan lack the entrepreneurial
skill to explore business opportunities and
diversification to spread risk of business loss. Some
even take loan to feed their families or repay other
loans rather than investing in businesses.The important
role of poverty alleviation of MF cannot be
overemphasised because of their nature of reaching
out to the unbanked poor people for instance it helps in
breaking the vicious cycle of poverty, (Kofi Anan, 2005)
they can start and grow their businesses, meet loan
obligations’ meet daily needs and at the same time
save for future occurrences.
In three decades of existence, microfinance has proven
to be a viable means of alleviating poverty, in other to
achieve this MFIs needs to continuously gather
information about people in the remote areas who have
not benefitted from the programme and to also make
the products they offer flexible to suit individual need
of clients. Government should also create an enabling
environment for microfinance to survive through fair
and flexible legislation to encourage new entrants and
sustainability of the existing ones. provision of
infrastructure especially in remote area is also
important so to enable easy access by MFIs.
MFIs also need to organise trainings for their official
regularly to broaden their knowledge of customer
needs and how to deliver them and to also ensure that
they give proper advise to customers.
It is also important to note that microfinance alone
cannot eradicate poverty (microcredit summit, 1997)
other means should also be taken into consideration. t
needs to be supported by other activities such as
access to good health, good nutrition and good
governance.