Understanding the role of microfinance in Poverty reduction: A study of ASA Bangladesh

Significance of Topic selection

In the present world we live in, practically everything revolves around money. With the growth of world economies different types of financial services have emerged to help people deal with the management of their money and other resources. In every country in the world both developing and developed countries, rich and poor economies, high-income or low-income countries, there exists some sort of financial institutions that serve people. The only difference and which is the main topic of discussion is that a large number of people in these different countries have little or no access to the financial services. The risks involved in giving loans without collaterals and also the high transaction costs involved with little loans, including the inability of financial institutions to operate in the very remote rural villages where low-income households live makes it difficult for the formal financial institutions. According to latest estimation by Financial access Initiative there are about "2.5 Billion adults in the world who do not use formal financial services to borrow or save" with about 80% of the total adult population of sub-Saharan Africa "unbanked".[1]

This gap between demand and supply of financial services is being filled up by Microfinance which is the provision of financial services to the poor. There has been a global movement in favor of microfinance in these past two decades from the slums of Dakar in Bangladesh and Belen in Peru to the dark corners of the squalors of Ajengunle in Lagos, Nigeria. Due to the fact that access to financial services can go a long way to help the poor in managing risks and loss better and also gives them the opportunity to make decisions that affect their own lives on what to do with their money for example how to send money from the city to a poor family member who lives in a very remote area in the village, how to save for future investment like the school fees of their children, for emergencies like sickness or death, take opportunities that help them increase their income or start business. Governments, International institutions, development NGOs around the world have all in one way or the other being instruments to the spread of Microfinance. As the potential Market for microfinance is huge, it is only but expedient that we get more understanding of Microfinance and its role in poverty reduction.


Literature Review

Microfinance is simply defined as the financial services for the poor (Helms 2004). It is involves providing small loans without collateral(micro-credt), collecting deposits, selling insurance, money remittances to poor customers "who had been initially written off by commercial banks as being unprofitable"(De Aghion and Morduch 2005) . Some literatures indicate that the ideas and inspirations behind microfinance are not that new, that the supply of loans to low-income households have been in existence for long time before the experiment on microcredit (Helms 2004) .Some other literatures have connected the foundation of Microfinance to the micro lending that started in Bangladesh in the 1970's to poor local villages (De Aghion and Morduch 2005). Most literatures refer to Mohammed Yunus as the Pioneer of microcredit because of his experiment project of lending small loans to the poor households of Jobra for use in running small business. Mohammed Yunus "an economist trained at Vanderbilt University lecturer at Chittagong University"[2] in the early 1970's. As a country that just gained independence from Pakistan after a civil war, with 80% of the population living in poverty due to the widespread flooding in Bangladesh(De Aghion and Morduch 2005), there was a lot to be done. So Mohammed launched an experiment to explore a way to help the poor enter a proper financial credit network (Du Xiaoshan, Sun Ruomei1997) lending small loans to the poor households to do small businessfrom but (The goal of Microfinance is to "provide millions of poor people with the continued access to credit and saving services that helps them better respond to income raising opportunities, better manage risks and loss and most essentially helps avoid future sliding into poverty or becoming further impoverished".


References

Books:

  1. Armend�riz de Aghion, Beatriz, and Jonathan Morduch, 2005, The Economics of Microfinance, Cambridge: MIT Press

  2. Du Xiaoshan and Sun Ruomei 1997 Rural Microcredit: International Experience and Chinese Pilot Projects of Funding the poor Cooperative Rural Microfinance in China pp 97-110,edited by Du Xiaoshan, Liu Wenpu, Zhang Baomin and Sun Ruomei, 1997, China Economics Publishing House

Articles:

  1. Adams, Dale and J.D Von Pischke 1992 Microenterprise credit programs: D�ja vu World Development, Vol. 20, No.10,pp. 1463-1470 Dale W Adams, J. D. Von Pischke
  2. Brandsma, Judith, and Rafika Chaouli, 1998. Making Microfinance Work in the Middle East and North Africa. Private and Financial Sector Development Group, Human Development Group, Middle East and North Africa Region, Washington D.C: World Bank Report 23076

  3. Morduch, Jonathan. 2000 .The Microfinance Schism. World Development Vol.28, No.4, pp.617-629

  4. Morduch, Jonathan .1999. The microfinance promise.Journal of Economic Literature. Vol 37 No.4, pp 1569-1614

[1] Financial Access initiative 2009 Half the world is unbanked Financial Access Initiative Framing note accessed from http://financialaccess.org/sites/default/files/110109%20HalfUnbanked_0.pdf on 16th November,2009

In this paper formal financial institutions includes semi-formal institutions but excludes informal financial sources like moneylender, pawnshops and other informal savings or credit scheme

[2] Armend�riz de Aghion, Beatriz, and Jonathan Morduch, 2005, The Economics of Microfinance, Cambridge: MIT Press

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