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Micro-Credit and the Economics of Developing Countries

The concept of Micro-financing, or Micro-credit, is to provide small amounts of money to the most insolvent individuals/populations in the shape of short-term loans. The important point of this baronial cause is the rate of interest charged is far below the common rate of interest. Initially, the loans sanctioned under Micro-financing, or Micro-credit were less than US$ 30, but now they are ranging from US$ 100 to US$ 500. The purpose of this increase is to create different kinds of self-employment opportunities, which can keep enable individuals comparatively less/unharmed in overall economic crisis of their surroundings.

Impact on Developing Nations A part from the simple financial aspect, Micro-financing, or Micro-credit programs does have considerable impact local development of under developing nations. These programs affect different sectors, for example, in agriculture, they have an impact on professional agriculture organizations, farmers’ cooperatives, village groups, in art & crafts, they affect different craft associations and craft groups. When we look their impact to the financial side they have considerable influence on financing of social economy such as village banks, savings and credit schemes.

In social protection sector these programs have significant impact as far as primary health centers and different health societies are concern. In this way, Micro-financing, or Micro-credit programs not only contribute in improved accessing of basic health, social, and family planning services, but also even in drinking pure water. “Another feature of this movement is that it relies on insurance and traditional solidarity networks which are relatively effective and encourage the regular reimbursement of loans.

” (Gbezo, 1999) By carrying out such programs also creates an opportunity to commence training activities particularly in the development of community and enterprise management. World Summit for Social Development has significantly initiated and developed the need of poverty annihilating programs. World is now mutually accepting that healthy economic growth based on equitable, labor-intensive, and heavy expenditures on social programs particularly aimed at the poor, is the only way to fight against poverty.

Different elements have led economists to think over the using micro-credit programs to promote overall economic growth with greater equity. They have been started to recognize the importance of empowering people (especially poor people) by increasing their reach to all the factors of production, including credit. Furthermore, the importance of the role of non-governmental organizations in such kind of development has started to be recognized as never before. “It is in that context that micro-credit has recently assumed a certain degree of prominence.

It is based on the recognition that the latent capacity of the poor for entrepreneurship would be encouraged with the availability of small-scale loans and would introduce them to the small-enterprise sector. ” (Premchander, 2003) People have started to enjoy more independence, lots of basic employment and self-employment opportunities emerged, and, more importantly it pursued thousands of women in economically productive activities. Presently, there are around more then 3,000 micro-financing institutions offering their services in developing nations.

These institutions are also helping to create much deeper and more widespread financial markets in their respective nations. In nations such as Ghana, Kenya, Malawi and Nigeria several informal and small-scale lending schemes named “merry-go-rounds”, “esusus” etc have been serving thousands of individuals of rural areas, and they still survive. They offer rural population the access to saving programs within their local territories to ensure a cushion against economic fluctuations.

This financial stability develops a cooperative and community feeling among them. These organized groups allow joint collateral and deliver valuable information that is quite useful for social and economic progress. All economies depend upon the intermediary function to transfer financial resources from savers to investors. In a market economy, this task is performed by the capital markets and different commercial banks. More prevalent financial intermediation and increasing variety & depth are an attribute of advancing development.

But in several developing nations, capital markets are not well established and are still at a fundamental stage, and commercial banks of such countries are also reluctant to give loan to the poor mainly because of the high transaction costs and lack of security. “The poor would borrow relatively small amounts, and the processing and supervision of lending to them would consume administrative costs that would be disproportionate to the amount of lending.

A study by the International Fund for Agricultural Development (IFAD) has confirmed that complicated loan procedures and paperwork, combined with a lack of accounting experience, limit poor people’s access to formal sources of credit. ” (Hamad, 1997) There is another obstacle is the attitude of the commercial lenders in rural areas they mostly prefer to deal with large-scale farmers only. The important character of these micro-credit programs is providing relatively small loans, based on a few hundred dollars at nearly all Therefore; repayment timeframe is also relatively short, for around a year.

This has a positive influence on women by benefiting them in their major activities, and the funds are primarily lent for agriculture, trading & distribution, small crafts & processing units. The infrastructure is light in general and the total process has participatory nature. The impact of micro-financing varies broadly between both rural and urban areas. In many developing nations, overall interest rates are comparatively high to start with; hence rates charged by micro-financing programs are rather high when the risk premium is added. Many of these micro-financing institutions take a high rate of repayment.

This is ascribable to the informal participatory arrangements, which create an environment in which debtors respect their obligations. It should be observed that though a large number of analyzes attempted so far on the impact of micro-financing programs on domestic income show that members of such programs normally have higher and more stable returns than they did before they joined the programs, some observers still have doubts about the findings of those analyzes. Furthermore, not many micro-financing programs can afford to attempt impact estimations because they are expensive and time-consuming in general.

There are serious differences among observers on the different methodologies used in some of these analyzes. In some events, even the stricter analyzes have developed inconclusive results. Some analyzes show that there are limits to the employ of credit as an tool for poverty obliteration, including difficulties in recognizing the poor and directing credit to reach the poorest of the poor. There is another fact that several individuals, particularly the poorest of the poor, are normally not in a position to attempt an economic activity, partially because they have less business skills and they even are less motivated for business.

“In many cases, micro-credit programs have been stand-alone operations. There is now considerable consensus that lending to the poor can succeed provided it is accompanied by other services, especially training, information and access to land. ” (Bhatt & Tang, 2001) But such activities demand healthy support from the public sector. In several lowest-income nations, lack of access to land is one of the most critical causes of rural poverty, which leads the poverty situation in those nations. However, there are few developing nations, which have significant land reform programs.

Moreover, in the development of micro-financing organizations, non-governmental institutions and foreign donors have played a key role. Non-governmental institutions classified according to their quality and strength. Conclusion Effective micro-financing programs do have impact, as tools for poverty reduction, on the economic stability and growth of developing nations. But it also depends one few things, which suggests that whether will they and how well they will successfully address the real economic limitations faced by the poor. “The micro-financial sector is still developing and extending.

The conditions suited on the poor help those people to get better access to financial services. In those areas where is worse access to financial services are often used various informal MFIs such different kind of rotational systems. ” (Boudreaux & Cowen, 2008) The main impact of micro-finance is in the form of savings, credit and insurance to help individuals in overcoming their financial constrains. Their impact on the developing economy can easily be observed by analyzing overall investment made in assets, facilitating activities done to earn a livelihood the protection against any potential economic threat and income instability.

References Bhatt, Nitin & Tang, Shui-Yan. (2001) “Delivering Microfinance in Developing Countries: Controversies and Policy Perspectives” Policy Studies Journal, Vol. 29, p. 58. Boudreaux, Karol & Cowen, Tyler. (2008) “The Micro-magic of Micro-credit: The Millions of Tiny Loans Microcredit Banks Make to the World’s Poor Do Not Work the Miracles Some Advocates Claim. but like the Wizard of Oz, Microcredit Does Not Need to Be Magic to Do a Great Deal of Good” The Wilson Quarterly, Vol. 32, Winter. pp. 11-15.

Gbezo, Bernard E. (1999). “Micro-credit in West Africa: How small loans make a big impact on poverty” The Magazine of the ILO: World of Work. Vol. 31. September / October. Retrieved on 07, Dec. 2008, from <http://www. ilo. org/public/english/bureau/inf/magazine/31/credit. htm> Hamad, Fawzi. (1997). “Micro-Finance for Macro-Results” UN Chronicle. Vol. 34, Spring. pp. 33-37. Premchander, S. (2003) “NGOs and Local MFIs-How to Increase Poverty Reduction through Women’s Small and Micro-Enterprise” Futures. Vol. 35, pp. 78-79.

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