Microfinance is a program in which small loans are provided to people in order to help them improve their lifestyle. It is particularly useful for individuals who live in poor countries, but who often do not have access to traditional banking systems.
History
Microfinance is the supply of financial products and services to poor people. It includes both loans and savings. Traditionally, microfinance companies focus on providing much-needed funds to start up a business for poor people. In addition to promoting business, microfinance also assists with the daily needs of the poor.
Microfinance has been a key part of the global economic growth and development. This is because small enterprises produce employment. Moreover, they can also be the basis for the development of other areas, such as health.
Microfinance has a rich history. The origins of microfinance go back to the mid-1800s, when the concept of saving and loans was introduced in England by Priscilla Wakefield. She started a savings bank catered to the poor parents and children.
By the 1820s, the loan fund system had spread to Ireland. Jonathan Swift lent small amounts to traders and co-signers.
Impact on poverty
In recent years, microfinance has been recognized as a major tool to combat poverty and inequality. A number of studies have looked at its impact on both poverty and economic development. Despite its popularity, it remains unclear whether microfinance really works.
Microfinance products are usually small loans that are made to low-income households. These products enable clients to improve their household income and build assets. However, it has also been criticized for exploitative operational mechanisms. For example, many microfinance schemes are not secured and do not make interest-free loans.
Increasing the number of microloans in an economy is not a panacea to poverty. The microfinance industry may be saturated. But it can play a role in poverty reduction through improving the quality of life for the poor.
Impact on economic growth
Microfinance has been an important part of improving economic growth in Sub-Saharan Africa. It provides training to people who want to start a business or expand an existing one. This increases their income and reduces poverty. The presence of microfinance also encourages the development of the financial sector and technological progress.
Various studies have found a positive correlation between microfinance and economic growth. However, some have been less optimistic. These include Raihan et al. (2017), which investigated the effects of microfinance on GDP in Bangladesh. A few others, however, find that there is no statistically significant relationship.
Other researchers have examined microfinance’s effect on the economy in other developing nations. Some studies have found that it has a negative impact on the growth of countries, while others have found that it has a positive impact.
Challenges to program adoption
Microfinance has been widely considered as one of the most effective methods to reduce poverty and empower poor individuals. It also contributes to economic growth by encouraging entrepreneurship. However, microfinance has been challenged to become a successful and sustainable industry. The microfinance industry has yet to expand its outreach to a broad base of economically excluded population.
Despite its positive effects, microfinance has yet to establish its place among the major players in the global financial system. It has to be reassessed.
The main challenge that remains with the microfinance sector is the higher operational costs. These include both personal and administrative expenses. This cost can be reduced through a few innovative measures.
Another challenge facing microfinance is the lack of diversity in the range of products offered. A lack of awareness in the target audience is also a factor.
Women are unable to access microfinance
Microfinance is a form of financial aid which targets the poor section of the society. The service is considered important in promoting economic development. Several microfinance institutions provide business trainings, information access and advocacy.
Women’s ability to participate in the economy is directly related to their level of education. The better a girl’s education is, the more likely she is to stay in school, seek medical care and delay marriage. This helps her gain access to employment opportunities.
In rural areas, women are often restricted by socio-cultural constraints. Some religious practices frown upon women working outside the home. Another obstacle is the lack of market awareness. It is difficult for women to gain access to work if they do not know the market.
Women are also overburdened with household duties. Their workload is further constrained by a lack of financial resources. However, access to credit can help them gain decision-making power in the household and respect from men.