Theory And Evidence Of Microfinance And Poverty Economics Essay

scheme And reason Of Micro pay And mendi ignorecy economic science Essay2.0 IntroductionIt is widely believed that, unitedly with improvement in their geographical surroundings, little finance is a tendinous quill to each(prenominal)eviate need and empower women in their culture. However these facilities ar not restricted to women only. It is also extended to all those who atomic design 18 attempt to combat impoverishment or to indulge in their profess entrepreneurship. Therefore, this chapter get come forth review definitions in the field of microfinance and need. To enlighten further the area, falsifiable demonst post atomic number 18 being analysed and discussed much appropriately be low-down.2.1 What Is Microfinance?image1.pngThe idea of microfinance started in Bangladesh al closely 1976 with Muhammad Yunus and Grameen Bank who has recently awarded the Nobel Peace Prize for his achievement. Microfinance refers to the supply of loans, savings and separat e base fiscal services to short. With innovative nub and training microfinance has been follow and implementd in most developing countries where it has gained unbelievable success. Moreover, from December 1997 bank December 2005 the number of microfinance institutions adjoind from 618 to 3,133. Supplementary evidences regarding its increases submit been attached at Appendix I.However, different people boast different views and opinions in love of Microfinance. For instance, Otero (1999) classifies Microfinance as the provision of financial services to low income, deplorable and rattling paltry self-employed people. Whilst Ledgerwood (1999) believes that it is a sustainable distress solution and it includes savings, realization and other financial services such(prenominal) as insurance and hire services, on the other hand Schreiner and Colombet (2001) described it as an attempt to word carcass out poverty by improving the access to small deposits and loans for myopic family lines who were being neglected by formal banks and financial institutions, broadly speaking because of their poor people credit worthiness.Generally speaking microfinance is becoming an imminent scotch tool to politicians to up bring those people who be vulnerable or beyond the minimal level of income holders. It is a way to extract the arts, qualities and skills that these people stimulate in front of the society by upgrading their enterprise, image and standard levels. In some countries, during the financial crisis that hit the global economy, governments have emphasised hard on these instruments to combat a way out of this turmoil. Such facilities, inclusive of small loans with low interest judge, counselling and bumper advertising campaign to communicate the concept of microfinance were brought to the poorest, especially in rural atomic number 18as.Microfinance involves short term savings and lending which ar different to that of formal banks. Such faci lities bear low interest evaluate and repayments facilities with the aim to cover the delivery court only. The constitutes of groovy are recouped upon maturity and whole administrative and transactions cost are ignored. Counselling is d maven through direct marketing where the cost involved in creation of awareness is low as these institutions marking mostly low or no profit at all. Their master(prenominal) objective is to improve the living conditions of those being afflicted by the iniquity of poverty.2.2 Historical Background on mendicancy destitution is a multiform issue which has always existed at different levels of society and in mingled forms across the world. penury has always existed merely the fundamental question what causes it. However, fit to the western conception, poor people are themselves accountable for their precarious situation. As the source of poverty lies in the socio sparing system, the solution also moldiness be at the societal level. A brief sketch of povertys floor is given in Appendix II.It is difficult to define poverty as there are various dimensions of poverty. Hulme and Mosley (1996) stated that microfinance is not a catholicon for poverty backup man and in some strips the poorest people were made worsened off by microfinance institutions. On the other hand Rogaly (1996) argued that Microfinance Institutions had advance man-to-man sector plan of attack to distribute resources to fight poverty. It did not prove to be beneficial to poor people as there was inadequate accomplishment and change taking place. At times they even failed to reach the poor, the much so as they had a limited impact on income. They encouraged women to greater dependence on their husbands but were unable to get out additive services which were desperately required.Therefore, poverty is a growing concern for all governments. They have taken a multi-dimensional approach to trim back poverty, with efforts including promotion of econ omic growth delivery of public services to all transfer of assets to poor people and introduction of a social protection system. then, the persistence of poverty and inequality is clearly a key concern for government policy.2.2.1 Poverty comeesThe literature on poverty is divided into two categories namely the fiscal approach supported by functional, and the non- fiscal approach supported by the non- utilitarian. This utilitarian approach places the conceptualization of welfare in the utility space where blessedness determines the level of welfare. But since utility is not directly observable, resources .i.e. income has been used to gradation welfare whereas the non-utilitarian view consists of the faith based, dungeon and talent approach. This is illustrated below.Figure 2.1 Poverty Approach reference point Adapted by International education enquiry CentreFrom the above diagram, the pecuniary approach identifies poverty as a shortfall in consumption or income. An income be low what is considered necessary to remove a minimum basket of basic goods would then be delimit as the poverty line. The main assumption made by this approach is that consumers objective is to maximize their utility and that the ensuing welfare can be measured by their total consumption whereas the livelihood approaches emerged in the mid-nineties as a holistic framework for analyzing the accompanimentors that influence men and women in fulfilling their livelihoods, reflecting their perceptions of poverty and well-being. It also refers to the participatory approach of getting poor themselves to be able to understudy the root, causes and the victims of poverty.Poverty is not a modern twenty-four hour period phenomenon. It has been around almost since the starting signal of civilization from the time man was expelled from the tend of Eden whereby he had had to start providing for himself. Poverty has always existed in gentleman societies for thousands of years. This is all ab out the faith based approach of poverty.Moreover, the capability approach, pioneered by Sen in the 1980s and 1990s, argues that monetary poverty approach measures individuals well-being but fails to address the utility that individuals gain from others, their welfare. For Sen, capabilities are the abilities to satisfy certain decisive functioning up to certain minimally adequate levels. Thus jibe to him, poverty is the malfunction of some basic capability.The concept of poverty is universally regarded as a multidimensional one. There is no unique conceptualisation but it may consist in each form of inequity, which is a source of social exclusion from the basic essentialities of human dignity. Thus, the Oxford Poverty valet Development Initiative (OPHI) uses an index namely the Multidimensional Poverty proponent (MPI)1index which complements a traditional focus on income to reflect the deprivations that a poor person faces with regard to education, health and living standard. It is the first worldwide measure of its kind, and offers a valuable complement to income poverty measures because it measures deprivations directly.According to me, a multifaceted definition of poverty would be-the lack of, and inability to afford, basic human needs, such as clean water, nutrition, health do by, education, clothing and tax shelter andthe scarcity of opportunities that are important in improving human capital and facilitating social mobility.Thus, to address the dramatic effects resulting from poverty, various multilateral organizations such as the United Nations have left no stone right-side-out(predicate) to combat this destitution. Moreover, different poverty reduction strategies and instruments have been developed in order to improve the poors standard of living and support them sever the nefarious cycle of poverty. Moreover these approaches can be broken further. This can be shown in the following diagram.Figure 2.2 Factors Affecting the Poverty ApproachSo urce Adapted by International Development Research Centre (IDRC)The monetary approach includes all income in money metric and in practice omits social goods. Under this approach mainly income and consumption are affected. Whereas, the livelihood approach comprises the capabilities, assets and activities required for a means of living. It enhances livelihood opportunities and shows how they relate to one some other.The faith-based approach consists of religious faith. Religious faith and humans have coexisted since the beginning of civilization and have played a very important intention in human life. The religious attitude is always based on the belief that there exists an all embracing, transcendental, moral law and that we human beings are bound to submit to its commands.Moreover, capabilities included not only basic individual ones such as nourishment and health but also more complex social ones, such as taking part in the community and achieving self-respect. Health and educat ion, for example, are both functioning achievements in themselves as well as capabilities that conquer people to achieve other set and crucial performance. For instance, a woman can have a monetary income but, because of sex activity discrimination, can be unable to buy food for her family She lacks the capability to achieve a basic functioning for life. A capability seems to liquefy the concepts of ability and capacity. The main focus of the dissertation is based on this approach.2.3 abstract TheorySince microfinance can make a contribution to eradicate poverty, to fail understand its significance, each of the poverty approaches is considered below.2.3.1 Link surrounded by Microfinance and monetary ApproachIn terms of economic policy, it recommends the reduction of poverty by change magnitude labor productivity, through interventions of a general nature. Therefore, microfinance has evolved as an economic development approach intended to benefit low-income groups. These co urses are an effective way to provide lowcost financial services to poor individuals and families as claimed by Miller and Martinez, (2006) Stephens and Tazi (2006). Once they benefit from microfinance services, they depart be able to establish more, save more eventually vapid consumption. In turn they will enjoy a good health conditions among family members.2.3.2 Link between Microfinance and Non- pecuniary ApproachFrom the economic policy standpoint, the non-monetary approach usually proposes targeted interventions which have the good of reducing the selection bias in favor of the poor coition to general kinds of interventions. Each non monetary approach has been considered below.2.3.2.1 Microfinance and faith basedPoverty and prosperity were considered to be the will of God. Thus religion is defined as an all round movement in the light of faith in one God and a sense of responsibility for the formation of horizon and belief, for the promotion of high principles of human m orality for the establishment of good transaction among members of the society and the elimination of every sort of undue discrimination and injustices including poverty. Thus with the help of microfinance, people are able to have a bonny earning.2.3.2.2 Microfinance and LivelihoodMicrofinance can help to establish or expand family enterprises, potentially making the difference between grinding poverty and economically promise life. Furthermore, these programs increase access to healthcare, making preventative healthcare measures more low-priced to the poor. Alternatively, more children are sent to school and stay enrolled for longer periods.2.3.2.3 Microfinance and faculty ApproachGiven that microfinance services are primarily focused on women, it is argued that women were empowered, through opportunities to take on leadinghip roles and responsibilities, breaking down of gender inequalities. Small loans can transform lives, especially those of women and children. The poor can deform empowered instead of disenfranchised. Homes can be built, jobs can be created, businesses can be launched, and individuals can feel a sense of worth again. fair sex are able to participate in the society, they are recognised for their help in their families. This in turn increases the monthly income for the family which ultimately increases standard of living.Generally, the most important crisis and the main reason for failure to repay loans by poor families is illness. However, households of microfinance clients appear to have better nutrition, health practices, and health outcomes than comparable non-client households. large and more stable incomes generally lead to better nutrition, living conditions, and contraceptive health care. Increased earnings and financial management options also allow clients to treat health problems promptly rather than waiting for conditions to deteriorate.Along with financial services, some microfinance institutions also provide health edu cation, usually in the form of short, simple preventive care messages on immunization, safe drinking water, and pre-natal and post-natal care while other programs provide credit products for water, sanitation, and housing. A growing number of microfinance institutions have forged partnerships with insurance providers to offer health insurance to clients.Moreover, another use of the microfinance services among the poor people is to invest in childrens education. Children of microfinance clients are more likely to go to school and study longer ultimately student drop-out rates are much lower. Hence there is no disparity in education. Thus, it is clear that what microfinance can do for the poor depends on the poors ability to utilize what micro-finance offers them. In numerous countries, micro-finance provides a window of probability for the poor to access a borrowing. These facilities also provide organizational help, training, synthetic rubber nets, empowerment, and financial and other help during crises. Once they benefit from these services, they will be able to make decisions that are better informed, smooth the consumption pattern, increase the expenditure on medical, education and other social occasions.2.4 Empirical EvidenceMost of these studies were carried out in least developed countries and developing countries where poverty is really a root problem for the country. These findings are the clearest evidence that micro finance is working in the way intended to bring sustained aid to those suffering from hardship vitrines. Thus the following sub sections are empirical studies performed in least developed country, developing countries and small island economies. They are classified by their corresponding approach of poverty namely the monetary and capability.2.4.1 Developing Countries2.4.1.1 fiscal ApproachJoy M Kiiru, John Mburu, Klaus Flohberg (2007) seek to measure the impact of microfinance on household incomes. They used a pooled info set col lected from the south western part of Makueni district in Kenya to study the households access to microfinance credit and how the credit affects their incomes as Cross sectional analysis fails to show any significant positive impact of microfinance on poverty reduction. They make up a weak positive significance of microfinance on household incomes, education and household head.Furthermore, in the research of Gertler et al. (2003), he shew more positive conclusions in terms of the ability of micro finance to reduce vulnerability who find access to micro finance that helps households to smooth consumption despite declines in health of adult family members. These authors have tried to find a relation between access to a financial institution and consumption shortfalls associated with ill health. They used geographic distance as a measure of access and find that for households in an area with a BRI branch health shocks have no effect on consumption.2.4.1.2 strength ApproachK. Rajen dran and R.P. Raya (2010) study the impact of microfinance on the empowerment in psychological, economic and social aspects and managerial skills of leaders of SHGs and their attitude in Vellore district. They surveyed 90 leaders and 90 animators of SHGs. Using the OLS they set in motion that microfinance and SHGs are effective in reducing poverty, empowering women, creating awareness and ensure sustainability of environment which finally result in sustainable development of the nation. But age and education does not have any influence on empowerment among the rural women.Moreover, the case study carried out in 2007 by Eduardo C. Jimenez and Pia Bernadette Roman in Philippines found on average 96.2% of the people who borrow in groups pay back their loans on time. More than 160 microfinance institutions have adopted the principle of no related but weekly repayment of loans with lending at commercial rates so that they can cover their costs and they were allowed to make a profit. Du ring that period, they have been able to target 436, 000 clients, 98% being women. The loan repayment rates of 96.2% were far higher than that recovered by most commercial banks. as luck would have it the project had increased the clients income by more than 28%. Their spending was mostly on school and food. So, for Philippines, this had an impact on its economy, thereby enhancing the life span, the literacy rate and also improving the standard of living of those people.2.4.2 Least Developed Countries2.4.2.1 Monetary ApproachKhandker (2005) reported the direct effects of microfinance programs on poverty. He examined 1,638 households that participated in two waves of the BIDS World Bank 1991/92 and 1998/99 surveys in Bangladesh and found that moderate poverty in the sample villages declined by 17% between the two waves of the survey, and uttermost(a) poverty declined by 13%. Among those households that participated in the microfinance programs, the poverty rate declined by 20% in the same period, with more than fractional of the nearly 3% annual moderate poverty decline among participants attributed to the microfinance programs alone. He further found that access to microfinance programs contributed to the reduction of both moderate and extreme poverty of individuals particularly women as well as for the village as a whole where inflow of microfinance funds to rural areas impacted the local anaesthetic economy and raised per capita household consumption for both participants and nonparticipants.Morduch (1998) move to purport specifically at the role microfinance plays in component the poor, and reported interracial results, including some positive and some negative impacts of microfinance in alleviating poverty and helping the poor. He used survey data collected in 1991/92 by the Bangladesh form for Development Studies, in collaboration with the World Bank, coating 87 villages and nearly 1800 households. Survey data was collected at triplet points d uring the collection period to capture seasonal variations in household luck and found that the microfinance programs benefited the moderately poor more than the destitute. Further, he found that households that are worthy to borrow and have access to the programs do not have notably higher consumption levels that control households. Additionally, he found that households eligible for programs have substantially lower variation in consumption and push supply across seasons. Thus the most important potential impacts of microfinance programs are with reducing ones financial vulnerability, and not necessarily poverty.2.4.2.2 Capability ApproachMorris and Barnes (2005) attempted to provide an overall assessment of the impact of microfinance, and examined the impacts of three microfinance programs in Uganda. baseline data was first collected in the winter of 1997 following a survey via random sample in respect of three program areas from programs clients and nonclients. To assess the impact thereof, the survey was repeated in the winter of 1999. The researchers found that microfinance programs did not help to alleviate poverty in program areas, though results from these impact studies indicated positive impacts on participants entrepreneurial business endeavours and within their own households. The authors further found that microfinance programs help to reduce financial vulnerability of poor individuals through the diversification of available income sources and the accumulation of assets.2.4.3 Small Island Developing produce (SIDS)2.4.3.1 Livelihood ApproachPaul B McGuire (1996) has provided an assessment of microfinance in the peaceable Island Countries (PICs) namely Cook Islands, Fiji, Kiribati, Papua New Guinea (PNG), Solomon Islands, Tonga, Tuvalu, Vanuatu and Western Samoa. Thus, he conclude that these people faced a number of constraints to sustainable microfinance, including low and extremely dispersed populations, the lack of transport and communic ations infrastructure in many areas, and the continuing importance of the non-monetised subsistence economy in many countries.Apparently, the stylised fact is less than clear. Despite the huge number of studies on microfinance and poverty alleviation in the developing countries, there exists little studies for small island economies. Thus this study attempts to fill the gaps by analyzing the impact microfinance on poverty and the welfare of households in Mauritius.As argued above, the facts and findings that were used have clearly indicated that microfinance is becoming a phenomenal contribution in building those economies that were previously struck by wars, earthy calamities and turmoil.WebsitesBank Of Mauritius Website http//www.bom.muCentral Statistic Office Website http//www.gov.mu/ gateway/site/cso (Accessed 23 October 2010) incision of Trade and Industry (DTI) Website http//www.dti.gov.ukGovernment of Mauritius Website http//www.gov.mu/portal/site/citizen dwellingpage (Acces sed 23 July 2010)http//businessafrica.net/africabiz/countries/mauritius.phphttp//faithbasedmicrofinance.info/default.aspxhttp//internationaldevelopment.wikia.com/wiki/Main_Pagehttp// publishers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1320549_code910083.pdf?abstractid=1291508http//web.worldbank.org/WBSITE/ external/COUNTRIES/AFRICAEXT/MAURITIUSEXTN/0,,menuPK381980pagePK141159piPK141110theSitePK381974,00.htmlhttp//www.africaneconomicoutlook.org/en/countries/southern-africa/mauritius/http//www.africanexecutive.com/modules/magazine/articles.php?article=3715http//www.blueorchard.com/jahia/Jahia/pid/341http//www.cato.org/pubs/journal/cj17n2-5.html ( accessed 1st december)Homepagehttp//www.gov.mu/portal/site/Mainhomepage/menuitem.cc515006ac7521ae3a9dbea5e2b521ca (Accessed 23 July 2010)http//www.idrc.cahttp//www.intracen.org/wedf/ef2006/global-debate/Resource-Person- ideas/Appanah_Paper.pdfhttp//www.kiva.org/about/microfinance,http//www.localhistories.org/povhist.htmlhttp//www.lww.com/static/docs /product/samplechapters/978-0-7817-7525-0_Front%20Matter.pdfhttp//www.mcci.org/business_finance_dbm.aspxhttp//www.microfinancefocus.comhttp//www.microfinancegateway.orghttp//www.mixmarket.org/mfi/trendshttp//www.nef.mu/documents/Liste_des_poches_de_pauvrete.pdfhttp//www.onepercentfortheplanet.org/en/http//www.ophi.org.uk/publications/ophi-working-papers/http//www.poverty-wellbeing.net/en/Home/Livelihood_Approacheshttp//www.rbapmabs.org/home/index.php/mabs-approach-training-and-technical-services/courses-and-training-offered-as-part-of-the-full-mabs-technical-assistance-package/mabs-approach-to-microfinancehttp//www.unohrlls.org/en/ldc/related/62/International Monetary Fund Website www.imf.org/National Women Entrepreneur Council http//nwec.intnet.muOrganisation for frugal Cooperation and Development Website http//www.oecd.org/homeSEDHA Website http//sehda.org/links.phpSmall and Medium Industries Development CorporationWebsite http//www.smidec.gov.mybooks1Books, Publication ThesisDa modar N. Gujarati (1996), fundamental Econometrics, 3rd Edition, McGraw-Hill International, Economics SeriesGoogoolye Heema Devi , 2004. An appraisal of the contribution of the DBM Ltd in the development of SMEs. DissertationMinistry Of Womens Rights, Child Development Family Welfare, 17 October 2002. Finding Hope Amidst PovertyMinistry Of Womens Rights, Child Development Family Welfare, 2001/02. Bilan, Republic of MauritiusSuresh M. Sundaresan, Microfinance emerging trends and challenges diarysAdrian Gonzalez, M.A., 2008. Microfinance, incentives to repay, and overindebtedness evidence from a household survey in bolivia, Dissertation (PhD) Ohio State University.Chandni Ohri, Microfinance and health a case for integrated service delivery, complaisant Enterprises Associates.Claudio Gonzalez- Vega, Richard L.Meyer, Sergio Navajas, Jorge Rodriguez- Meza and Guillemo F. Monje, 1996. Microfinance market niches and client profiles in Bolivia, Economics and Sociology Occasional paper n o 2346.Copestake, J. Bhalotra, S. and S. Johnson, 2001. Assessing the impact of micro-credit A Zambian case study, Journal of Development Studies, 37(4), pp. 81-100.Dean Karlan, Martin Valdivia, 2010. Teaching Entrepreneurship Impact of Business instruction on Microfinance Clients and Institutions, pp. 1-45Essentials, 1999. Microfinance, a synthesis of lessons learned.Gertler, Paul, Levine, David I., Moretti, Enrico, 2002. Do Microfinance Programs Help Families Insure using up against Illness?, California Center for population research online working paper series.Guush Berhane and Cornelis Gardebroek, 2009. Does microfinance reduce rural poverty? Evidence based on a household panel data from Northern Ethiopia, International association of rude economists Conference, Beijing, China, 16-22 August 2009.J.T.O Oke, R. Adeyemo and M.U Agbonlahor, 2007. An empirical analysis of microcredit repayment in South-western Nigeria, Humanities and Social Sciences Journal, 2(1), pp. 63- 73.Jon W estover, 2008. The record of microfinance the effectiveness/ ineffectiveness of microfinance program as a means of alleviating poverty, Electronic Journal of Sociology, pp.1-8.Joy M Kiiru, John Mburu, Klaus Flohberg, 2007. Does participant in microfinance program improve household incomes Empirical evidence from Makueni District, Kenya, Centre for development Research, Bonn University, pp. 405-410.K. Rajendra and R. P. Raya, 2010. Impact of microfinance- An empirical study on the attitude of SHG leaders in Vellore DistrictTamil Nadu, India, Global Journal of Finance and Management, 2(1), pp. 59-68.Maldonado, Jorge H. and Claudio Gonzalez-Vega, 2008. Impact of Microfinance on Schooling Evidence from Poor Rural Households in Bolivia, World DevelopmentMatthew Ruben, 2007. The discovery of microfinance for poverty relief in the developing world, Discovery Guides. getable from http//www.csa.com/discoveryguides/discovery guides-main.php (accessed 14 October 2010)McIntosh, Craig and Bruce Wydick, 2005. Competition and Microfinance, Journal of Development Economics, Vol. 78, pp. 271-298.Morduch, J., 1999, The microfinance promise, Journal of Economic Literature 37(4), pp. 1569-1614.Morduch, Jonathan and Barbara Haley, 2002. Analysis of effects of microfinance on poverty reduction, NYU Working paper 1014, 28 June 2002.Morris, Gayle and Barnes, Carolyn, 2007. An assessment of the impact of microfinance, Journal of microfinance, 7(1), pp. 40-45.Nicolas Gachet, Virginie Staehli, 2006. Formalisation through micro-financean empirical study in Egypt, Working paper 52.Perumal Koshy and V.N Parsad, 2007. Small and micro enterprises a tool in the fight against poverty, Munich Personal REPEC Archieve, paper number 22827.Rajesh Kumar Shastri, 2009. Microfinance and poverty reduction in India a comparative study on Asian countries, African Journal of Business Management, 3(4), pp. 136-140.S. Khandker, 2001. Does microfinance really benefit the poor- Evidence from Bangladesh, Asia and peaceable Forum on Poverty.Schreiner, Mark, 2000. Credit Scoring for Microfinance. Can It Work? Journal of Microfinance, 2(2), pp. 105-117.Susan Johnson, 2004, The dynamics of competition in Karatinas financial markets assessing the impact of microfinance in Kenya, Institute for Development studies, Imp-Act Working Paper 9, pp. 1-31.Tara. S. Nair, 2001. Institutionalising microfinance in India an overview of strategic issues, Economic and semipolitical Weekly, 36(4), pp. 399-404.Tassel E Van, 2004. Household bargaining and microfinance, Journal of Development Economics , pp. 449-468Tiyas Biswas, Women empowernment through microfinance a boon for development