malvernmugadzikwa
Dr Keen Mhlanga
IT is not necessarily wrong to reduce poverty and make some money on the other side.
The question, however, arises as to whether that is indeed what is happening with microfinance.
Microfinance institutions are currently experiencing very high repayment rates.
Coupled with growing loan sizes by clients, these institutions are even making profits.
No wonder there seems to be a good reason for the world to celebrate the microfinance revolution in developing economies such as Zimbabwe.
Microfinance is the means of providing a variety of financial services to the poor, based on market-driven and commercial approaches.
These services may include savings, insurance, money transfers and credit.
However, the microfinance movement to date has generally favoured microcredit, which is the provision of small loans to households that are perceived to be too poor to qualify for loans from formal financial institutions.
Poor households are caught up in a vicious cycle of poverty, where labour, their best resource, is “locked up” due to different constraints, including lack of liquidity.
The household’s productivity is limited to a level whereby the available income is insufficient to sustain good standards of living.
For example, a poor household may have family members who are willing to work in the family garden to grow sufficient food crops.
However, if they cannot afford improved crop varieties and farm inputs, then it will not be possible for the family to grow enough food.
The household’s labour is, therefore, said to be locked up due to a liquidity constraint, among other setbacks.
Many governments and donor communities believe the liquidity constraint is the most significant setback impeding poor households and that if it is addressed it will be possible for households to escape poverty.
Economists argue that to break the vicious cycle of poverty, there needs to be an outside force that will break the chain by injecting some liquidity, thereby unlocking the household labour.
Microfinance promises not only to break the vicious chain of poverty but also to initiate a whole new cycle of virtuous spirals of self-enforcing economic empowerment that leads to increased household well-being.
The role of microfinance in financial systems, whether global or local, is to provide financial services and a substantial flow of finance to the economically marginalised populations that are often neglected by the formal financial sector.
With the evolution of microfinance in developing economies, people excluded from conventional financial systems have access to alternatives to save and borrow, rather than having to rely on their family and friends.
In both developing and developed economies, microfinance offers an alternative to conventional financial services. Additionally, it plays a significant role in facilitating the financial inclusion of disadvantaged populations.
Microfinance has been recognised as an important instrument in fighting poverty by major organisations worldwide.
MFIs’ social aspirations commonly include poverty reduction, job creation, gender empowerment, economic growth, social inclusion and eventually contributing to social development.
Microfinance has the capacity to increase self-employment and create microenterprises in developing countries.
With the assistance of microfinance, households are able to expand opportunities for income accumulation, thus allowing people to provide for their families.
Having access to credit can help stop poverty in the immediate term, disrupt the cycle of poverty by making money available and facilitate potential business opportunities.
Microfinance has also been known to cater for underserved and disadvantaged populations like women, disabled people, the elderly, the unemployed and those who simply wish to meet their basic needs.
Families may save and even invest in better housing, healthcare and education, making the positive impacts more sustainable and lasting.
Most banks will not extend loans to someone without credit or collateral because of the risks involved in doing so, yet those in poverty do not have any credit or collateral.
By extending microfinance opportunities, people have access to small amounts of credit, which can then stop poverty at a rapid pace.
In many developing nations, the primary recipients of microloans tend to be women.
Up to 95 percent of some loan products extended by microfinance institutions are given to women.
Those with disabilities, those who are unemployed and even those who simply beg to meet their basic needs are also recipients of microfinance products that can help them take control of their own lives.
Microfinance is one way of fighting poverty in rural areas, where most of the world’s poorest people live.
It puts credit, savings, insurance and other basic financial services within the reach of poor people. Through microfinance institutions such as credit unions, financial non-governmental organisations and even commercial banks, poor people can obtain small loans, receive money from relatives working abroad and safeguard their savings.
Online Reporter