FINANCE

Role of Microcredit in reducing Poverty



Abstract

The general objective of this study is to analyze the role of micro financing in reducing poverty. The focus of the study is on the performance of microfinance sector in relation to Bangladesh and poverty alleviation in general. Through the analysis of literature review and case studies of countries such as Bangladesh, it is expected that microfinance can increase and uplifts the economy of the developing nation and the lifestyle of the households.

Keyword(s): Microcredit, Bangladesh,Poverty, Microfinance, Capital

Role of Microcredit in reducing Poverty

Introduction

Microcredit is a method for providing small amounts of capital to poor people so that they can improve their existing income-generating activities, or develop new ones, and is widely used in developing countries. It is based on the principle of providing credit to individuals within a group, where each person in the group is mutually responsible for the credit repayment of the other members. This social collateral removes the need for physical collateral, which poor people lack. The term 'microcredit' has changed into 'microfinance' (MF) in recent times due to its wider role, as microfinance adds the provision of savings and insurance services to that of credit.

Research Objective

The research objective of this study is to “analyze the role of micro financing in reducing poverty”.

Background

Literature Review

The microfinance sector works on an underlying assumption that is the poor also get involved in high-earning economic activities, but they have limited access to and insufficient savings provision, insurance and credit facilities. The micro-financial sector captures that very essence and helps catering the economic needs of the poor. Currently, Microfinance is responsible for poverty reduction and financial regeneration plans around the world. This sector focuses on the incentives, which are responsible for effective performance in the context of small transactions and a large number of clients. The essence of microfinance is to provide greater access to low-income populations, especially women and rural communities in developing countries, access to finance. Microfinance enables them to improve their living conditions, as well as contributes to financial stability. Numerous stories of successful small businesses demonstrate social impact of microfinance, as well as his valuable contribution to reducing poverty and increasing women's empowerment. Microcredit organizations are a source of knowledge and provide rural communities consulted regarding the foundations of business and access to financial services.

Microfinance activities typically involve (1) small-to-medium loans, (2) appraisal of investments and borrowers, (3) collateral alternatives, which includes compulsory savings or group savings, (4) access to substantial loans, on the basis of repayment performance, (5) flowing loan monitoring and disbursements, and (6) products for dependable savings.

Taking into account the current demand for financial services in Uzbekistan, creating an appropriate legislative framework, capacity building of micro-credit organizations, and it should be noted, activities aimed at raising awareness about the social impact of microfinance - are key initiatives towards poverty reduction. The role of credit is limited due to the difficulties presented to target and reach the poorest of the poor. The term poverty include those who have no capacity to undertake ...