Factors Influencing Operation of Microfinances:African Countries (Term Paper Sample)

Discussion of microfinance and how it might be used to diminish poverty in the developing world with emphasis on actual transactions and policies that have been implemented
Case of African countries
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Introduction
Microfinance institutions have been widely reviewed and researched on as an alternative for improving people’s livelihood. They are well known for offering financial services and solutions to their customers (Adler & Kwon, 2002). Research has shown, that the institutions have been formed with an aim of offering financial solutions to low income populations (Ansari et.al, 2012). Developing countries are characterized by low income, high population, high unemployment, and low asset ownership which has made microfinance thrive well in this region. They are out to offering microcredit as well as microfinance services to their clients. The current research will thus assess microfinance institutions and how they would be used to alleviate poverty in this regions.
Poverty has been termed as inability to cater for basic needs. It could thus be economic, social, or even political. Researchers have proven the crucial role microfinance institutions (MFI) play in supporting the poor. In the so called developing and less developing worlds, poverty business has been seen to be one of the most profitable business. For instance, the poverty business is worth more than $33 billion in United States which is a rich country, and worth more than $100 billion in Africa (Armendáriz & Morduch, 2010). The poor have been seen to continue straggling in poverty and other in extreme poverty. As such development agendas including sustainable development goals (SDG.1), has been put forwards to deal with poverty in all its form. Most developing countries also have poverty reduction strategy, and make use of economic survey report to track their strategic developments.
Globally there is an estimated 1.2 to 1.5 billion people living in extreme poverty, and about 162 million children under chronic under-nutrition. Research has shown, that one way of dealing with poverty, could be empowerment of the poor (Arora & Romijn, 2012). This would involve increasing their food availability, reducing interest rates, improving employment, and sources of income. In addition, reduced prices for fortified foods would help a lot. In this regards, putting into perspective that the poor have low resource endowment, MFIs would play a key role in their empowerment. Therefore, the current research will focus on developments in the MFIs and how they can be used and have been used to reduce poverty.
History and background of microfinance
Microfinance institutions have been formed with an aim of offering financial solution to low income population. They were thus formed with an intent of poverty reduction and thus almost all of them have been offering loans, offering insurance services, deposits as well as withdrawals. They can be non-profit making organizations, regulated financial institutions, or commercial banks providing micro services to low income customers (Roy, 2012). The microfinance institutions (MFI) have been distinct and different from banks with respect to their scope. Although both offer financial solutions to customers MFI offer the services to those really in need, offering loans on little or no asset demand, while banks require collaterals to offer the service. Thus MFIs have targeted customers including individuals and small business with limited access to financial support from convectional banks and related services.
Therefore, MFIs operate under five main features; first the customers lie within the low income population. The low income earners are characterized with limited assets endowment and thus have limited access to commercial banks. This constrains their development, and thus MFIs come in to bridge their financial gap. Second, the institutions operate under micro loans. Thus they offer small loans to their customers to lower their liquidity risk. Besides, they deal with low income earners who are out to starting micro businesses. Third, they offer their loans within a short period (Banerjee & Duflo, 2007). This could be supported by the small ‘micro loans’ that they offer to their clients. Forth their loans do not need collaterals like is the case with commercial institutions. For this reason they are best suited for the low income earners who are less endowed with resources. Lastly, since the loans are offered to persons with low income, the frequency of repayment is high. Some will even pay on daily and weekly basis in relation to the amounts they are able to generate.
Evolution of MFI
Africa has had MFIs for many centuries. With the realization that Africa is characterized with low income, as well as high financial demands, the MFIs came in to offer a solution for development as well as improved livelihoods. Research has shown that most low income earners get finances from money lender who offer the finances at high interest rates and thus impacting negatively on their development. Consequently, they have remained poor with low ability to even meeting their basic needs (Bateman, 2010). There has been many forms of MFIs around the globe ranging from informal, small-scale, and rotating savings and loans clubs. This can be traced in countries like England, Ireland, and Germany. In the 19Cc we has an example of saving and credit MFI in Indonesia. In some countries like Nigeria, MFIs date back to 15th Cc. however, generally in Africa, mainstreaming as well as formalization of MFIs gained momentum in the late 90s.
The evolution has been coupled with policies and transactions that has been taking place to get MFI to the state it is today. The 1st phase began in 1950s where strategies like direct credit, and subsidized credits were the main operation means for getting finances to clients. The main aim was to reach out to people who has limit reimbursement capabilities. Throughout the phase the main assumption was that lack of finances was the major hindrance to poverty eradication. The 2nd phase began in the 70s where the main strategy was through use of microcredits. They were disseminated through NGOs which were mainly seen to offer social assistance to the clients. The 3rd phase was in 90s which was coupled with formalization of the MFIs. At this stage, besides offering loans, they began offering other services like insurance and savings. At this point, the poor felt they would be able to improve their livelihood as such would be moved from poverty. Thus at the 4th phase the MFIs developed a well-organized and credit culture. At this point it became a financial institution holding to its main principle of serving the poor.
State of MFIs in Africa
Around the continent, there is high diversity in terms of geography. To be able to serve the poor as the main objective of MFIs in Africa, they have undertaken diverse approaches. For instance there has been use of traditional group based systems as well as specialized lending by backs, rural banks, NGOs, and non-bank financial institutions. There has been high use of community based approaches to be able to grow coverage. Use of local based cooperatives, clubs and village banks have widely been used to grow MFIs in Africa (Bateman & Chang, 2012).
Africa is a leading MFIs continent in terms of deposit volumes as well as customers served. This has led to improved livelihood for most people who have been able to grow their business as exit the poverty group. However, the MFIs in Africa have been faced with a lot of challenges including operations in rural areas where infrastructure is inadequate, and population’s remains low resulting to high operational costs. To counter the problems the institutions have laid emphasis on use of new technologies, as well as improved communication.
Factors influencing operation of microfinances
MFIs operate under the principle of assisting the low income earners. However, they are challenged by high interest rates, capital inadequacy, high default rates, and lack of credit risk management.
Most MFIs operate in the rural areas. Thus their operation is influenced by the level of risk associated with operations. The rural areas are associated with high cost of operation for the MFIs which results to low development (Banerjee & Jackson, 2017). Reliance on the economic activities could influence the operation of MFIs and their operation.
Major policies
In Africa, microfinance can be traced back through history and its development pinned on a good development road. It has for instance been anchored on the strategic plan. Making reference to the 2002 strategic plan, MFI policies followed the strategic plan, 2003-2007. Thus working with other complementary policies in the finance sector like the financial policy, policy on poverty reduction, private sector development strategy, agriculture and rural development strategy, and rural finance guidelines. Thus implementation has mainly been to link the poor with financial services, as well as development of systems that work for them.
In Africa, operation of MFIs mainly depend on the sage of the member country. This has led to three categories of MFIs including the emerging where the main lenders include personal lenders, NGOs, and the informal sector lending. An example is the Susus in Ghana, wool and mohair in Lesotho, as well as MMDs in Niger (Bruton et.al, 2013). There are the 2nd category which have grown and are recognized including SACCOs and PADME in Benin. The third category involve high developed institutions like K-Rep Bank and Equity Building Society i...