Free «Aspects Of Finance: Microfinance in Developing Countries» Essay Sample

Abstract

Microfinance is an area that is currently being taken into serious scrutiny especially in the developing countries where the turnover of new and innovative business is at the all time high. This exercise is going to define and highlight all the dynamics in details in these countries and what the response is. There will be a show of examples of how the idea has been put in the ground. The obstacles that have been faced in the quest for the successful implementation of this idea also will be shown as well as the level of banking in Africa and the other developing continents.

Introduction

Microfinance is the provision of monetary services to low income market clients who have the basic ideas of starting a business or enterprise but don’t have direct access to the banks or other major financial institution (Samuelson, 2010).  This is through international groups, local financial institutions and even to some extent the governments. With the increase of technological levels in the global arena, there is also an expansion of the business platform in the same rate to newer markets in the developing world. This has proved to be an untapped market that has not been fully exploited. Interestingly though, it has been observed that entrepreneur in this countries are taking the initiatives of developing their ideas with the technological advantage that are available. However, the financing of their ideas has proven to be their greatest challenge. This is the reason why the aspect of microfinance is the most suitable element that is supposed to be directed to this destination. In this study we are going to look at the current level of banking and finance in these countries, the challenges that are facing the idea, the inclusive financial systems, the criticsm as well as the success stories that have been highlighted.

 Before any further progress it is better to go into details of what and how microfinance dealt with. This is basically the advancement of financial resources to the people who need them for purely development purposes. This is different from aid which is often granted to the developing nation where it is basically meant for consumption. Microfinance can sometimes be equated to microcredit but the latter is more specific but can be accessed by both the affluent and those who are. Microfinance is best suited for the developing countries because it is known that these places have rich natural endowments such as the minerals oils and other resources that are supposed to be economically viable (Morduch, 2005).

In addition to that, the concept of microfinance is that this it can pay by itself through regular repayment plans that is customized for the borrower and is supposed to come from the business’ returns. However, this is different from the mainstream borrowing which is not categorical that the repayment should come from the interest of the business. Because of the lack of direct access to such high ended financial facilities the institutions or government that supports this initiative more often than not demand lower rates of returns as well as an extended time plan as Samuelson (2010) shows.

The Current Financial Situation in the Developing Countries

Most of the developing countries are in Africa, the Caribbean and parts of Asia. This is ironical because it can be attested geographically that these parts have the most of the world’s resources in terms of minerals. The businesses in these countries are not as developed as they should because of factors that are more than the economical namely the social and geographical factors. But the only solution is to empower the economic dimension first, then the rest can follow suit.

Microfinance in the developing countries is currently not at its optimum level. This is so because the banking sector is not developed due to the low level of knowledge about the importance of this concept to the vast majority. As a matter of fact most of the domestic borrowers don’t approach the institutions that offer such facilities because of one reason or another. This means that the rate of growth that is supposed to be achieved in these destinations is not only compromised.

 In addition to that, the institutions that lend financial assistance are either government run or monopolistic (TriplePundit, 2009). As we have seen above this scenario translates to the exorbitant rates that are demanded by these small entrepreneurs.

 The other major issue that is evident in the developing countries is the monopoly of the multinational corporations that make all the profits and plough them back to their mother countries leaving the poor nations poorer (Morduch et al, 2005). The situation automatically locks out the emerging entrepreneurs who can’t successfully start business. This means that they may not need the financial assistance in the first place.

However with all these situations present in the countries, there has been an advent of positive news and information that is being reported from the developing countries like an increase I per capita income of these nations, the introduction of new technology in the financial sector. One may then ask what challenges are there that face the concept of microfinance here.

Challenges in the microfinance sector

These challenges are those obstacles that face the microfinance concept and we are going to loom a t about four major ones namely, the current policy and regulation, the competition, the condition of the borrowers and the social-political aspects. They pose a more challenging aspect than initially expected.

The current policy and regulation of financial activities is not well taken care of by the concerned authorities. This is because the economic leaders don’t pass laws that protect the rights of the lower end borrowers (Hill, 2001). By saying this, it means that the level of rates of interests that is being charged is not standardized. As a matter of fact, some banks charge more that their counterar6tds on developed world. But without political and economic policies in place, the micro credit and financing activities are usually hampered by such unscrupulous business practice. Secondly the policy seldom talks about grants and financial safeguard of these institutions for the consumers. This has been seen from the recent past when some institutions go under with money belonging to the savings of the members. This has been am great challenge.

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Secondly is the level of competition that is evident in these destinations. There are banks and institutions that provide good looking financial credit and loans which posses multiple charges that are hidden and end up banking more money than the intended se by the people who borrowed. The competition demands an upfront profit without looking at the situation of the consumers. This is why microfinance needs to be based on the local funds. The SACCOs and other institutions have to be constituted by the local business people to facilitate the smooth running of the same (Hill, 2010).

 Thirdly is the state of the borrowers of the credit that more often than not compromises the situation. By these it means that they have little or no collateral to take these loans while at the same time lacking the sufficient information about the management of the money they receive. This proves to be a great challenge because they can have the money but the returns don’t come at the expected time that they are needed.

 This has made some of the financial lenders to incorporate the aspect of learning and educating the local people on the basics of financial responsibility and management to help curb this issue. At the same time it has been realized that unsecured loans are also forwarded to the most promising candidates who show potential to have business minds and practices but lack the required collateral.

Lastly, the greatest challenges so far has been the influence of social and political aspects in these countries. For instance as Morduch et al (2005) there are customs believes and practices that don’t approve of interest let alone credit. This makes the entrepreneurs in these cultures shun the aspect of borrowing ion the basis of these grounds. With a more complex society such as that, it is almost impossible to carry out any business ventures with the people in these places.

Because of these challenges being of long term consequence and may not have the sufficient solution in the short term, the new concept of inclusive financial systems is slowly gaining ground in the developing countries.

The inclusive financial system as a solution to the challenges

This is a system that basically seeks to engage in a more diverse way of financially empowering the low ended people in the developing world by combining the efforts of the microfinance providers with a strategy to achieve this goal. These providers of microfinance in these countries who include, informal provides such as pawn brokers savings providers etc,  self help groups, NGOs and other formal institutions can position themselves to provide long term solution to the above stated challenges.  It is important to look at the roles that each of the four providers can play in making the microfinance institution be at an all time success.

The local or informal providers of microfinance are the nearest to the people on the ground hence should offer flexibility and convenience in the service that they offer to the people. This means that they should make the most of their presence felt a (Hill 2010).

In the same breath, the self help groups too should seek to not only provide the monetary contribution but also ensure that members are educated about the basic financial management for the members. They should also take the initiative of aiming for the higher financial success. The nongovernmental organizations are also microfinance providers that should be in a position of empowering the people who are entrusted the. They should provide information and services which include the mobility in banking and financial management facilities.

Lastly are the financial organizations that are formal in nature which include banks and other recognized institutions (Samuelson, 2010). They have been accused of making most of the opportunity as business without necessarily considering the social and economic impact of the people that they do business with. They should adopt social responsibilities and other extra-business activities of sponsorship, and educating the masses about the need for educating the masses on the aspect of micro financing monetary empowerment.

However the concept of microfinance has been criticized because of various issues. First is the business aspect that it takes on supposedly poor people. This is on the grounds of morality because some of the providers know that the borrowers are ultimately nit able to meet the targets and will eventually default hence gain more from them. In addition to that the hidden charges have also been seen as unfair however these are issues that can be solved.

In conclusion, the aspect of microfinance in developing nations is a welcome one. With the advent of the economic success it is inevitable that the developed countries will follow suit. But ultimately with the challenges, criticism and so on, a solution based on inclusion of the providers can be of great importance.