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Microfinance and poverty[ edit ] Financial needs and financial services. In developing economies and particularly in rural areas, many activities that would be classified in the developed world as financial are not monetized: This is often the case when people need the services money can provide but do not have dispensable funds required for those services, forcing them to revert to other means of acquiring them.
Common substitutes for cash vary from country to country but typically include livestock, grains, jewelry and precious metals. As Marguerite Robinson describes in The Micro finance Revolution, the s demonstrated that "micro finance could provide large-scale outreach profitably," and in the s, "micro finance began to develop as an industry"p.
In the s, the micro finance industry's objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing poverty.
While much progress has been made in developing a viable, commercial micro finance sector in the last few decades, several issues remain that need to be addressed before the industry will be able to satisfy massive worldwide demand.
The obstacles or challenges to building a sound commercial micro finance industry include: Poor regulation and supervision of deposit-taking micro finance institutions MFIs Few MFIs that meet the needs for savings, remittances or insurance Limited management capacity in MFIs Institutional inefficiencies Need for more dissemination and adoption of rural, agricultural micro finance methodologies Members lack of collateral to secure a loan Microfinance is the proper tool to reduce income inequality, allowing citizens from lower socio-economical classes to participate in the economy.
Moreover, its involvement has shown to lead to a downward trend in income inequality Hermes, Building a new home may involve saving and protecting diverse building materials for years until enough are available to proceed with construction. Because all the value is accumulated before it is needed, this money management strategy is referred to as 'saving up'.
A poor family might borrow from relatives to buy land, from a moneylender to buy rice, or from a microfinance institution to buy a sewing machine.
Since these loans must be repaid by saving after the cost is incurred, Rutherford calls this 'saving down'. Rutherford's point is that microcredit is addressing only half the problem, and arguably the less important half: Microcredit institutions should fund their loans through savings accounts that help poor people manage their myriad risks.
Recent studies have also shown that informal methods of saving are unsafe. For example, a study by Wright and Mutesasira in Uganda concluded that "those with no option but to save in the informal sector are almost bound to lose some money—probably around one quarter of what they save there.
The new paradigm places more attention on the efforts of poor people to reduce their many vulnerabilities by keeping more of what they earn and building up their assets.
While they need loans, they may find it as useful to borrow for consumption as for microenterprise. A safe, flexible place to save money and withdraw it when needed is also essential for managing household and family risk.
This microfinance project functions as an unofficial banking system where Jyothi, a "deposit collector", collects money from slum dwellers, mostly women, in order for them to accumulate savings.
Jyothi does her rounds throughout the city, collecting Rs5 a day from people in the slums for days, however not always days in a row since these women do not always have the funds available to put them into savings.
They ultimately end up with Rs at the end of the process. However, there are some issues with this microfinance saving program. One of the issues is that while saving, clients are actually losing part of their savings.
There is also the risk of entrusting their savings to unlicensed, informal, peripatetic collectors. However, the slum dwellers are willing to accept this risk because they are unable to save at home, and unable to use the remote and unfriendly banks in their country.
This specific microfinance project is an example of the benefits and limitations of the "saving up" project Rutherford, Everyday 15 women would save shillings so there would be a lump sum of 1, shillings and everyday 1 of the 15 women would receive that lump sum.
This would continue for 15 days and another woman within this group would receive the lump sum. At the end of the 15 days a new cycle would start. This ROSCA initiative is different from the "saving up" example above because there are no interest rates affiliated with the ROSCA, additionally everyone receives back what they put forth.
This initiative requires trust and social capital networks in order to work, so often these ROSCAs include people who know each other and have reciprocity. The ROSCA allows for marginalized groups to receive a lump sum at one time in order to pay or save for specific needs they have.
Microfinance debates and challenges[ edit ] There are several key debates at the boundaries of microfinance. This program was established in as one of the only microfinance lenders in the country. One of the principal challenges of microfinance is providing small loans at an affordable cost.The Directors' Consortium leverages the world-renowned research of Stanford Law School, University of Chicago Booth School of Business, and the Tuck School of Business at Dartmouth to address the fundamental "big issues" surrounding corporate governance.
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