Importance of Microfinance in Developing Countries

Abstract

In the recent years, microfinance has lightened up the hope to deal with poverty issues by addressing specific needs of destitute and poor people. In developing countries, microfinance has been the driving force of economic progress and stability of financial service sector. The paper has highlighted significance of microfinance in retrieving developing economies by scanning and evaluating the growth trend of microfinance industry in the year 2010. The paper has viewed progress graph of microfinance in a global perspective, as well. The paper has drawn examples from the practical world to identify retreat and advancement of microfinance initiatives in developing countries. With emphasis on viability and expansion of microfinance institutions, there is considerable implication for sound regulatory system to govern and assist microfinance activities.

Key Words: Microfinance, developing countries, economic progress, global perspective, microfinance institutions, regulatory system

Importance of Microfinance in Developing Countries

Introduction

The paper aims at highlighting the importance of microfinance in developing countries by determining the nature of relationship between microfinance concept and developing countries' financial position. The paper determines this relationship by focusing on trends of microfinance in developing countries in the last three years. In the light of practical world examples and prior literature, the paper develops a thorough understanding of the subject matter.

Discussion

Started thirty years back, microfinance has shown exemplified years of strong growth and productivity by developing a positive impression on general public opinion and development professionals (Severino, 2012). During all these years, microfinance was assumed to be an answer to poverty; however, the dawn of 2010 brought significant injuries to the sector due to varied crisis on a local scale in Nicaragua, Morocco, and India (Severino, 2012).

Prominent examples of fraud and financial schemes were noted into the countries of Kenya, Colombia and Benin, where pyramid and ponzi schemes under the name of microfinance institutions have led to significant losses (The Americas, 2008). Hence, key stakeholders of the sector have started to rethink on innovating practices that can refocus on microfinance while developing a sustainable economic model.

Microfinance

According to Asian Development Bank (2000), microfinance is the stipulation of varied financial services ranging from savings to insurance to provide financial assistance to low income households, poor people and small enterprises. The instrument is assumed to be a critical element of effective strategy to reduce poverty.

Through microfinance, countries can provide an efficient and improved access to financial services such as insurance, credit and savings (Asian Development Bank, 2000). With specific focus on poor people, microfinance approach may allow people to enhance their capacity of earning by developing their assets and microenterprises, appropriately manage their risk, and live a quality life by bringing their consumption to evens (Asian Development Bank, 2000). One of the early progressive works in this domain was the inauguration of Grameen Bank in Bangladesh (Ruben, 2007).

As of recent statistics and operational scale of microfinance, approximately 82% of the global loan portfolio is represented by 100 largest institutions with 80% borrowers (Annibale & Leijon, 2012). Microfinance practices and regulations may vary across different ...