How Can Microfinance Be Modified To Increase Its Benefits? Critical Thinking Example
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Microfinance or Microcredit can be defined as the extension of small amounts of money as loans to poor families or individuals so that this money could be used for generating income for the upgrading and development of the borrower’s standard of living. In other words, microfinance is a savings and credit system specially introduced and designed for poor people who have no means to access credit unions or standard banking systems (Gow 11).
Microfinance institutions are famous for giving small loans to poor populations in developing countries to provide people with enough resources for starting their own business. This phenomenon is highly praised worldwide as microfinance helps people to come out of poverty in a decent manner. On the other hand, this useful tool is also criticized for not benefitting the poor. According to its opponents, microfinance makes peoples’ situation even worse than their previous conditions. This criticism is based on the ground that many people fail to return the loans and their broken economic condition becomes more difficult for them. There is great argument regarding the supposed needless and extreme pressure for repayment on clients. The microfinance industry is also frequently criticized for its unfair attitude towards the poor as they are encouraged to take debt with soaring interest rates. There are many examples in this regard that support this criticism such as “farmer suicides in India that were blamed on microfinance debt, and the larger 2010 default crisis in the state of Andhra Pradesh, which led to calls for dramatic reforms to the already heavily regulated sector” (Field, Holland & Pande 3).
The criticism on microfinance is reasonable to a certain extent as microfinance programs run at a higher cost and their interest rates are also very high (15%-35%). These interest rates are even increased when the microfinance programs are launched by the commercial institutions. It is worth-mentioning that microfinance assistance programs also help the poor to learn about money-saving methods through a ‘bring-under-control’ attitude (Gow 12). For these reasons, microfinance projects are valued all over the world. However, the criticism that this method also affects poor must be considered as a positive criticism and steps must be taken for the improvement of this process. There is always an area of improvement and microfinance can improve the benefits for people if some measures are taken accordingly and properly.
Even though it is indicated that microcredit inflicts scrawny impacts on long-established socioeconomic dealings, there are a lot of reasons to expect that microfinance programs can be amended for the improvement of their effects on investments in businesses as well as alleviation of poverty (Field, Holland & Pande 9). This can be done through enhancing and better understanding the consequences of microfinance on a variety of significant outcomes on development.
First, the microfinance contracts must be made more flexible. Evidence suggests that general contract designs concerning microcredit put limitation on the various ways these loan funds are used by the poor. However, the introduction of grace periods or reducing frequency of repayments may increase the self-insurance ability of a micro-entrepreneur. Such a change may let people to have greater time for the mobilization of extra support for avoiding defaults. Many people would be saved from liquidating their businesses and financial assets for making payments to banks on time (Field, Holland & Pande 11).
Second, the impacts of microfinance and its benefits may be increased through direct encouragement for greater investments in businesses. This can be done by improving training programs whereby clients are taught the skills to use their loans successfully for setting up and running businesses. Improvements can be made in this scenario by ensuring more accommodating and helpful environments for free or private enterprise outside the classroom. In particular, women must be encourages and aided as a lot of cultures regard working as an inappropriate practice for women especially when it concerns uncertain commercial ventures (Field, Holland & Pande 13).
Third, microfinance can also be used as a tool for social capital building. The microfinance product designs have been conventionally underpinned by the social capital. Micro-entrepreneurs may be supported by social capital through the introduction of informal insurance networks (Field, Holland & Pande 14). Microfinance can bring more benefits if rural population is given more focus, attention, and consideration while giving out loans. This is evident that one of the most impactful shortcomings of the present microfinance structure is that more or led every evaluation take place in an urban setting (Field, Holland & Pande 18). In addition, the credit bureaus’ formation has the tendency of increasing the capacity of microfinance institutions to review and evaluate client credit risk. In the similar fashion, proper regulation may also help in encouraging microfinance institutions to provide the clients with an array of financial products. Thus, the informed policies may work for the enhancement of microfinance programs and their efficiency (Field, Holland & Pande 21).
Microfinance has helped poor people all over the world as a vaccine for poverty lessening. Therefore, it is the responsibility of the respective authorities and governments to help in the expansion and regulation of microfinance organizations. Free reins must be provided by every government to microfinance organizations so that the poorest populations in the respective regions can be helped through the provision of microfinance. Considering the global poverty levels, it is also necessary for microfinance organizations to reach larger numbers of poor people through building up more capacity. Moreover, it is also crucial for microfinance institutions to develop suitable training programs for the development of the microfinance program staff. It is an extremely significant step needed to develop an efficient and effective human workforce that may impart its responsibilities smartly to operate the microfinance programs (Braun 334). In short, it is important to realize that even though microfinance has various disadvantages, it is still an effective means for rural poor households to gain access to credit and increase their assets (Braun 273).
Braun, J. (2009). The Poorest and Hungry: Assessments, Analyses, and Actions : An IFPRI 2020 Book. Washington, D.C.: International Food Policy Research Institute.
Field, E., Holland, A., & Pande, R. (2014, September 1). Microfinance: Points of Promise. Retrieved January 16, 2015, from http://www.hks.harvard.edu/index.php/content/download/69342/1250178/version/1/file/Microfinance_Rohini288.pdf
Gow, K. (2000, December 1). Banking on women: Achieving healthy economies through microfinance. WE International, 11-13.
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