2.0 Introduction
It is widely believed that, together with improvement in their geographical surroundings, micro finance is a powerful tool to alleviate poverty and empower women in their development. However these facilities are not restricted to women only. It is also extended to all those who are struggling to combat poverty or to indulge in their own entrepreneurship. Therefore, this chapter will review definitions in the field of microfinance and poverty. To enlighten further the study, empirical evidence are being analysed and discussed more appropriately below.
2.1 What Is Microfinance?
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The idea of microfinance started in Bangladesh around 1976 with Muhammad Yunus and Grameen Bank who has recently awarded the Nobel Peace Prize for his achievement. Microfinance refers to the supply of loans, savings and other basic financial services to poor. With innovative means and development microfinance has been adopted and practiced in most developing countries where it has gained unbelievable success. Moreover, from December 1997 till December 2005 the number of microfinance institutions increased from 618 to 3,133. Supplementary evidences regarding its developments have been attached at Appendix I.
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However, different people have different views and opinions in respect of Microfinance. For instance, Otero (1999) classifies Microfinance as the provision of financial services to low income, poor and very poor self-employed people. Whilst Ledgerwood (1999) believes that it is a sustainable poverty solution and it includes savings, credit and other financial services such as insurance and payment services, on the other hand Schreiner and Colombet (2001) described it as an attempt to phase out poverty by improving the access to small deposits and loans for poor households who were being neglected by formal banks and financial institutions, mostly because of their poor credit worthiness.
Generally speaking microfinance is becoming an imminent economic tool to politicians to up bring those people who are vulnerable or beyond the minimal level of income holders. It is a way to extract the arts, qualities and skills that these people possess in front of the society by upgrading their enterprise, image and standard levels. In some countries, during the financial crisis that hit the global economy, governments have emphasised heavily on these instruments to combat a way out of this turmoil. Such facilities, inclusive of small loans with low interest rates, counselling and bumper advertising campaign to promulgate the concept of microfinance were brought to the poorest, especially in rural areas.
Microfinance involves short term savings and lending which are different to that of formal banks. Such facilities bear low interest rates and repayments facilities with the aim to cover the delivery costs only. The costs of capital are recouped upon maturity and whole administrative and transactions cost are ignored. Counselling is done through direct marketing where the cost involved in creation of awareness is low as these institutions target mostly low or no profit at all. Their main objective is to improve the living conditions of those being afflicted by ‘the curse of poverty.’
2.2 Historical Background on Poverty
Poverty is a complex issue which has always existed at different levels of society and in various forms across the world. Poverty has always existed but the fundamental question what causes it. However, according to the western conception, poor people are themselves accountable for their precarious situation. As the source of poverty lies in the socioeconomic system, the solution also must be at the societal level. A brief sketch of poverty’s history is given in Appendix II.
It is difficult to define poverty as there are various dimensions of poverty. Hulme and Mosley (1996) stated that microfinance is not a panacea for poverty alleviation and in some cases the poorest people were made worse off by microfinance institutions. On the other hand Rogaly (1996) argued that Microfinance Institutions had encouraged single sector approach to distribute resources to fight poverty. It did not prove to be beneficial to poor people as there was inadequate learning and change taking place. At times they even failed to reach the poor, the more so as they had a limited impact on income. They encouraged women to greater dependence on their husbands but were unable to provide additional services which were desperately required.
Therefore, poverty is a growing concern for all governments. They have taken a multi-dimensional approach to reducing poverty, with efforts including: promotion of economic growth; delivery of public services to all; transfer of assets to poor people and introduction of a social protection system. Thus, the persistence of poverty and inequality is clearly a key concern for government policy.
2.2.1 Poverty Approaches
The literature on poverty is divided into two categories namely the monetary approach supported by utilitarian, and the non-monetary approach supported by the non- utilitarian. This utilitarian approach places the conceptualization of welfare in the utility space where satisfaction determines the level of welfare. But since utility is not directly observable, resources .i.e. income has been used to measure welfare whereas the non-utilitarian view consists of the faith based, livelihood and capability approach. This is illustrated below.
Figure 2.1: Poverty Approach
Source: Adapted by International Development Research Centre
From the above diagram, the monetary approach identifies poverty as a shortfall in consumption or income. An income below what is considered necessary to consume a minimum basket of basic goods would then be defined as the poverty line. The main assumption made by this approach is that consumers’ objective is to maximize their utility and that the ensuing welfare can be measured by their total consumption whereas the livelihood approaches emerged in the 1990s as a holistic framework for analyzing the factors that influence men and women in fulfilling their livelihoods, reflecting their perceptions of poverty and well-being. It also refers to the participatory approach of getting poor themselves to be able to understudy the root, causes and the victims of poverty.
Poverty is not a modern day phenomenon. It has been around almost since the beginning of civilization – from the time man was expelled from the Garden of Eden whereby he had had to start providing for himself. Poverty has always existed in human societies for thousands of years. This is all about the faith based approach of poverty.
Moreover, the capability approach, pioneered by Sen in the 1980s and 1990s, argues that monetary poverty approach measures individual’s well-being but fails to address the utility that individuals gain from others, their welfare. For Sen, capabilities are the abilities to satisfy certain crucial functioning up to certain minimally adequate levels. Thus according to him, poverty is the malfunction of some basic capability.
The concept of poverty is universally regarded as a multidimensional one. There is no unique formulation but it may consist in any form of inequity, which is a source of social exclusion from the basic essentialities of human dignity. Thus, the Oxford Poverty & Human Development Initiative (OPHI) uses an index namely the Multidimensional Poverty Index (MPI) [1] index which complements a traditional focus on income to reflect the deprivations that a poor person faces with regard to education, health and living standard. It is the first international measure of its kind, and offers a valuable complement to income poverty measures because it measures deprivations directly.
According to me, a multifaceted definition of poverty would be:-
the lack of, and inability to afford, basic human needs, such as clean water, nutrition, health care, education, clothing and shelter; and
the scarcity of opportunities that are important in improving human capital and facilitating social mobility.
Thus, to address the dramatic effects resulting from poverty, various multilateral organizations such as the United Nations have left no stone unturned to combat this destitution. Moreover, different poverty reduction strategies and instruments have been developed in order to improve the poor’s standard of living and help them sever the vicious cycle of poverty. Moreover these approaches can be broken further. This can be shown in the following diagram.
Figure 2.2: Factors Affecting the Poverty Approach
Source: Adapted by International Development Research Centre (IDRC)
The monetary approach includes all income in money metric and in practice omits social goods. Under this approach mainly income and consumption are affected. Whereas, the livelihood approach comprises the capabilities, assets and activities required for a means of living. It enhances livelihood opportunities and shows how they relate to one another.
The faith-based approach consists of religious faith. Religious faith and humans have coexisted since the beginning of civilization and have played a very important role in human life. The religious attitude is always based on the belief that there exists an all embracing, transcendental, moral law and that we human beings are bound to submit to its commands.
Moreover, capabilities included not only basic individual ones such as nourishment and health but also more complex social ones, such as taking part in the community and achieving self-respect. Health and education, for example, are both functioning achievements in themselves as well as capabilities that allow people to achieve other valued and crucial performance. For instance, a woman can have a monetary income but, because of gender discrimination, can be unable to buy food for her family: She lacks the capability to achieve a basic functioning for life. A capability seems to combine the concepts of ability and capacity. The main focus of the dissertation is based on this approach.
2.3 Conceptual Theory
Since microfinance can make a contribution to eradicate poverty, to better understand its significance, each of the poverty approaches is considered below.
2.3.1 Link between Microfinance and Monetary Approach
In terms of economic policy, it recommends the reduction of poverty by increasing labor productivity, through interventions of a general nature. Therefore, microfinance has evolved as an economic development approach intended to benefit low-income groups. These programs are an effective way to provide lowâ€cost financial services to poor individuals and families as claimed by Miller and Martinez, (2006); Stephens and Tazi (2006). Once they benefit from microfinance services, they will be able to earn more, save more ultimately smooth consumption. In turn they will enjoy a good health conditions among family members.
2.3.2 Link between Microfinance and Non- Monetary Approach
From the economic policy standpoint, the non-monetary approach usually proposes targeted interventions which have the advantage of reducing the selection bias in favor of the poor relative to general kinds of interventions. Each non monetary approach has been considered below.
2.3.2.1 Microfinance and faith based
Poverty and prosperity were considered to be the will of God. Thus religion is defined as an all round movement in the light of faith in one God and a sense of responsibility for the formation of thought and belief, for the promotion of high principles of human morality for the establishment of good relations among members of the society and the elimination of every sort of undue discrimination and injustices including poverty. Thus with the help of microfinance, people are able to have a decent earning.
2.3.2.2 Microfinance and Livelihood
Microfinance can help to establish or expand family enterprises, potentially making the difference between grinding poverty and economically secure life. Furthermore, these programs increase access to healthcare, making preventative healthcare measures more affordable to the poor. Alternatively, more children are sent to school and stay enrolled for longer periods.
2.3.2.3 Microfinance and Capability Approach
Given that microfinance services are primarily focused on women, it is argued that women were empowered, through opportunities to take on leadership roles and responsibilities, breaking down of gender inequalities. Small loans can transform lives, especially those of women and children. The poor can become empowered instead of disenfranchised. Homes can be built, jobs can be created, businesses can be launched, and individuals can feel a sense of worth again. Woman are able to participate in the society, they are recognised for their help in their families. This in turn increases the monthly income for the family which ultimately increases standard of living.
Generally, the most important crisis and the main reason for failure to repay loans by poor families is illness. However, households of microfinance clients appear to have better nutrition, health practices, and health outcomes than comparable non-client households. Larger and more stable incomes generally lead to better nutrition, living conditions, and preventive health care. Increased earnings and financial management options also allow clients to treat health problems promptly rather than waiting for conditions to deteriorate.
Along with financial services, some microfinance institutions also provide health education, usually in the form of short, simple preventive care messages on immunization, safe drinking water, and pre-natal and post-natal care while other programs provide credit products for water, sanitation, and housing. A growing number of microfinance institutions have forged partnerships with insurance providers to offer health insurance to clients.
Moreover, another use of the microfinance services among the poor people is to invest in children’s education. Children of microfinance clients are more likely to go to school and study longer ultimately student drop-out rates are much lower. Hence there is no disparity in education. Thus, it is clear that what microfinance can do for the poor depends on the poor’s ability to utilize what micro-finance offers them. In many countries, micro-finance provides a window of opportunity for the poor to access a borrowing. These facilities also provide organizational help, training, safety nets, empowerment, and financial and other help during crises. Once they benefit from these services, they will be able to make decisions that are better informed, smooth the consumption pattern, increase the expenditure on medical, education and other social occasions.
2.4 Empirical Evidence
Most of these studies were carried out in least developed countries and developing countries where poverty is really a root problem for the country. These findings are the clearest evidence that micro finance is working in the way intended to bring sustained aid to those suffering from hardship cases. Thus the following sub sections are empirical studies performed in least developed country, developing countries and small island economies. They are classified by their corresponding approach of poverty namely the monetary and capability.
2.4.1 Developing Countries
2.4.1.1 Monetary Approach
Joy M Kiiru, John Mburu, Klaus Flohberg (2007) attempted to measure the impact of microfinance on household incomes. They used a pooled data set collected from the south western part of Makueni district in Kenya to study the households’ access to microfinance credit and how the credit affects their incomes as Cross sectional analysis fails to show any significant positive impact of microfinance on poverty reduction. They found a weak positive significance of microfinance on household incomes, education and household head.
Furthermore, in the research of Gertler et al. (2003), he found more positive conclusions in terms of the ability of micro finance to reduce vulnerability who find access to micro finance that helps households to smooth consumption despite declines in health of adult family members. These authors have tried to find a relation between access to a financial institution and consumption shortfalls associated with ill health. They used geographic distance as a measure of access and find that for households in an area with a BRI branch; health shocks have no effect on consumption.
2.4.1.2 Capability Approach
K. Rajendran and R.P. Raya (2010) study the impact of microfinance on the empowerment in psychological, economic and social aspects and managerial skills of leaders of SHGs and their attitude in Vellore district. They surveyed 90 leaders and 90 animators of SHGs. Using the OLS they found that microfinance and SHGs are effective in reducing poverty, empowering women, creating awareness and ensure sustainability of environment which finally result in sustainable development of the nation. But age and education does not have any influence on empowerment among the rural women.
Moreover, the case study carried out in 2007 by Eduardo C. Jimenez and Pia Bernadette Roman in Philippines found on average 96.2% of the people who borrow in groups pay back their loans on time. More than 160 microfinance institutions have adopted the principle of no collateral but weekly repayment of loans with lending at commercial rates so that they can cover their costs; and they were allowed to make a profit. During that period, they have been able to target 436, 000 clients, 98% being women. The loan repayment rates of 96.2% were far higher than that recovered by most commercial banks. Luckily the project had increased the clients’ income by more than 28%. Their spending was mostly on school and food. So, for Philippines, this had an impact on its economy, thereby enhancing the life span, the literacy rate and also improving the standard of living of those people.
2.4.2 Least Developed Countries
2.4.2.1 Monetary Approach
Khandker (2005) reported the direct effects of microfinance programs on poverty. He examined 1,638 households that participated in two waves of the BIDS – World Bank 1991/92 and 1998/99 surveys in Bangladesh and found that moderate poverty in the sample villages declined by 17% between the two waves of the survey, and extreme poverty declined by 13%. Among those households that participated in the microfinance programs, the poverty rate declined by 20% in the same period, with more than half of the nearly 3% annual moderate poverty decline among participants attributed to the microfinance programs alone. He further found that access to microfinance programs contributed to the reduction of both moderate and extreme poverty of individuals particularly women as well as for the village as a whole where inflow of microfinance funds to rural areas impacted the local economy and raised per capita household consumption for both participants and nonparticipants.
Morduch (1998) attempted to look specifically at the role microfinance plays in helping the poor, and reported mixed results, including some positive and some negative impacts of microfinance in alleviating poverty and helping the poor. He used survey data collected in 1991/92 by the Bangladesh Institute for Development Studies, in collaboration with the World Bank, covering 87 villages and nearly 1800 households. Survey data was collected at three points during the collection period to capture seasonal variations in household circumstances and found that the microfinance programs benefited the moderately poor more than the destitute. Further, he found that households that are eligible to borrow and have access to the programs do not have notably higher consumption levels that control households. Additionally, he found that households eligible for programs have substantially lower variation in consumption and labour supply across seasons. Thus the most important potential impacts of microfinance programs are with reducing one’s financial vulnerability, and not necessarily poverty.
2.4.2.2 Capability Approach
Morris and Barnes (2005) attempted to provide an overall assessment of the impact of microfinance, and examined the impacts of three microfinance programs in Uganda. Baseline data was first collected in the winter of 1997 following a survey via random sample in respect of three program areas from programs clients and nonâ€clients. To assess the impact thereof, the survey was repeated in the winter of 1999. The researchers found that microfinance programs did not help to alleviate poverty in program areas, though results from these impact studies indicated positive impacts on participants’ entrepreneurial business endeavours and within their own households. The authors further found that microfinance programs help to reduce financial vulnerability of poor individuals through the diversification of available income sources and the accumulation of assets.
2.4.3 Small Island Developing State (SIDS)
2.4.3.1 Livelihood Approach
Paul B McGuire (1996) has provided an assessment of microfinance in the Pacific Island Countries (PICs) namely Cook Islands, Fiji, Kiribati, Papua New Guinea (PNG), Solomon Islands, Tonga, Tuvalu, Vanuatu and Western Samoa. Thus, he concluded that these people faced a number of constraints to sustainable microfinance, including low and highly dispersed populations, the lack of transport and communications infrastructure in many areas, and the continuing importance of the non-monetised subsistence economy in many countries.
Apparently, the stylised fact is less than clear. Despite the huge number of studies on microfinance and poverty alleviation in the developing countries, there exists little studies for small island economies. Thus this study attempts to fill the gaps by analyzing the impact microfinance on poverty and the welfare of households in Mauritius.
As argued above, the facts and findings that were used have clearly indicated that microfinance is becoming a phenomenal contribution in building those economies that were previously struck by wars, natural calamities and turmoil.
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