Question: “Microfinance appears to offer a ‘win-win’ solution, where both financial institutions and poor clients profit” (Morduch, 1999). Critically assess this statement with reference to the empirical literature.
Microfinance has achieved growing significance as a tool for poverty alleviation with the year 2005 marked as the United Nations International Year of Microcredit. Over the years, the world has witnessed a remarkable growth in the number of institutions offering microfinance and the number of clients reached. Figures reported to the Microcredit Summit Campaign show that as at 2007, 3,352 institutions offered microfinance to about 155 million clients, 68 percent of which were defined as poor clients. (Daley-Harris 2009) This represents an increase to the 54.5 percent of microfinance offered to poor clients in 1997. The study also showed that the number of institutions offering microfinance had increased by more than 400 percent. These statistics alone make a compelling argument for the impact of microfinance but statistics do not always show the whole picture. The widely-held assumption has generally been that microfinance is an essential tool for reducing poverty in a society. However, this assumption has been based mostly on case studies and anecdotes and has not always been the case. Studies conducted by the Snodgrass and Sebstad, 2002 on behalf of the USAID on microfinance banks in different countries have shown that the impact of microfinance on net income gains of borrowers varies from country to country. One another widely held myth is that the institutions that offer microfinance must be making profits because there must be some sort of profit in it for them. It is also difficult to truly measure the impact of a change without knowing what the situation would have been without the change. Therefore, with this essay, the writer attempts to evaluate the impact of microfinance on poor societies and the financial institutions that offer it.
Difference between Microfinance and Microcredit
For the purpose of this study, it would be important to know the difference between microfinance and microcredit. While microcredit involves making small loans to businesses and individuals, microfinance encompasses that and entails other financial services offered on a small scale. It usually refers to loans, savings, insurance, transfer services and most importantly, community development provided to low income earners. According to Khandakar and Rahman (2006), Microfinance is essentially a transformation of the microcredit revolution that began in the 1970’s. This could be the reason why the two terms are thought of as one. Proponents of microfinance as opposed to microcredit see microfinance as an attempt to satisfy the needs of the clients rather than that of the donor.
Demand for Microfinance
There has always been a demand for financial services in general, especially credit. This is because proceeds from an...