Micro Finance and Its Growing Importance Worldwide

Micro finance is a vital tool for economic growth and poverty reduction worldwide. It provides small loans to people who are often excluded from traditional banking systems.

The Grameen Bank in Bangladesh, a pioneer in micro finance, has lent over $23 billion to over 9 million borrowers since its inception in 1983. This staggering figure demonstrates the immense potential of micro finance.

Micro finance institutions have grown exponentially in recent years, with the number of institutions increasing from 1,200 in 2002 to over 4,000 in 2019. This surge in growth is a testament to the demand for micro finance services.

Micro finance has been instrumental in empowering women, who are often the primary borrowers and recipients of benefits. In fact, the Grameen Bank's loan repayment rates are significantly higher among women borrowers, with an average repayment rate of 98% compared to 96% for men.

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Microfinance has been a game-changer for poverty-stricken and low-income households, making credit accessible to those who were previously shut out by banks. Banks today generally don't extend loans to those with little to no assets, and microfinancing fills this gap.

The philosophy behind microfinancing is that even small amounts of credit can help break the cycle of poverty. This initiative presents opportunities for education and jobs, as families receiving microfinancing are less likely to pull their children out of school for economic reasons.

People are more likely to open small businesses with microfinancing, creating new jobs and improving the standard of living amongst impoverished communities.

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Microloans have very high repayment rates, with 96 percent of loans being repaid as reported by Kiva.

This is impressive, especially considering that microloans are often provided to individuals who are considered "risky" by traditional financial institutions.

Repayment rates are high because lenders can research and choose the borrowers they want to fund, creating a connection between two people.

This personalized approach allows lenders to feel invested in the success of the borrower, which can lead to higher repayment rates.

In fact, Kiva's model allows lenders to fund loans as low as $25, making it accessible to anyone who wants to contribute to a loan.

The high repayment rates are a testament to the effectiveness of microloans in helping borrowers achieve their financial goals.

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Microfinancing is a game-changer for poverty-stricken households, making credit accessible to those who need it most.

Banks often shy away from lending to low-income individuals due to lack of assets, but microfinancing fills this gap.

This approach is based on the idea that even small amounts of credit can break the cycle of poverty.

Families who receive microfinancing are less likely to pull their children out of school for economic reasons, giving them a better chance at education.

People who receive microfinancing are also more likely to start small businesses, creating new job opportunities.

However, there are also social and financial challenges associated with microfinance initiatives.

Some community members may take advantage of others, either intentionally or unintentionally, through poorly run organizations.

This can be a major issue, especially in areas where there's a lack of trust and social capital.

Rates of inflation can also cause funds to lose their value, harming savers and collectors alike.

In some areas, it's difficult to replicate the success of the Grameen Bank, which serves over 7 million poor Bangladeshi women.

This is often due to lower population densities, making it harder to meet operating costs.

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There are several key debates at the boundaries of microfinance, which can make it a challenging field to navigate.

One of the main debates is about the effectiveness of microfinance in reducing poverty.

Some critics argue that microfinance can actually increase poverty and inequality, while others believe it has the potential to be a powerful tool for economic growth.

Operating costs are high for microfinance institutions (MFIs) because it takes a lot of work to provide microfinance services. Many MFIs work with clients in rural areas, often combining education and other financial services in their weekly visits.

For each microloan, an MFI employee must put in the time, labor, and administrative attention to make sure the borrower understands the terms of the loan and follow up on a repayment schedule. This is much more expensive than disbursing one big loan.

It's much more expensive to disburse many small loans rather than one big loan.

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There are several key debates at the boundaries of microfinance. These debates highlight the complexities and nuances of this field.

One of the main debates is about the effectiveness of microfinance in reducing poverty. The evidence is mixed, with some studies showing positive impacts and others finding limited or even negative effects.

The boundaries of microfinance are also debated due to the lack of standardization in how it is practiced. This makes it difficult to compare and evaluate different microfinance programs.

Another key debate is about the role of microfinance in promoting economic growth. Some argue that it can help stimulate local economies, while others claim that it can actually exacerbate income inequality.

The challenges of microfinance are many, and they vary depending on the context and location. From high interest rates to limited access to financial services, there are many obstacles to overcome.

Market saturation is a major challenge in the microcredit industry. It can be difficult for small economies to absorb the influx of supply generated by new microcredit-fueled businesses.

The owners of micro-enterprises within these communities often have limited skill sets and resources available, leading to a "copycat" phenomenon among small businesses. This results in a limited variation in products and services offered.

A high number of individuals selling similar products and services can cause new entrepreneurs to be subject to cutthroat competition over a demand that has not expanded proportionally with the supply.

Mission Drift is a phenomenon where microfinance institutions (MFIs) tend to cater to wealthier customers, rather than their original target of poor families. This can happen through an increase in the average loan size, allowing financially stronger individuals to get loans.

Economists suggest that this is not just about cost minimization, but also about the interplay between the company's mission and regional characteristics.

MFIs may select wealthier clients because of the cost differential between them and the poor. This can lead to a tradeoff between economic reasons and ethical responsibilities.

Working conditions in MFI affiliates can be a major concern. Critics argue that MFIs often don't take responsibility for the working conditions of poor households.

Borrowers in some cases become quasi-wage laborers, selling crafts or agricultural produce through an organization controlled by the MFI. This has sparked concerns about working hours, holidays, working conditions, safety, and child labor.

MFIs like BRAC have been particularly criticized for this type of relationship. Few rules or standards govern working conditions in these cases.