Over the last 15 years microfinance institutions (MFIs) have rapidly expanded. The number of poor families with a microloan has grown from 7.6 million in 1997 to 137.5 million in 2010. Microcredit has generated significant confidence for fast poverty alleviation; creating a multiplier effect leading to the eradication of poverty and hunger, universal primary education, the promotion of gender equality and empowerment of women in developing nations. It can be argued that microcredit is a “win-win” opportunity, in which the poor are given the financial capital and means to pull themselves out of poverty trap (Duflo, E et al, 2013). However this essay will be analyzing the potential drawbacks as well as benefits MFIs face by providing loans to the poor. In recent years Microfinance has been subjected to heavy criticisms from economists arguing that MFIs are having a negative impact in developing countries. Questioning whether microfinance will be able to reduce worldwide poverty and raise the living standards of the poor?
Microfinance is the supply of small-value loans (often against below market interest rates), savings and other basic financial services to the poor in developing countries, who would otherwise have no alternative means of gaining financial assistance. The aim of microfinance is to allow people living in poverty access to financial capital to run their businesses, build assets and manage risks (CGAP, 2014). It has been estimated that 2.5 billion people, have neither a bank account nor access to semi-formal financial services such as “micro...
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...t of poverty trap. MFIs were faced with many challenges, the fundamental challenge being the adverse selection and moral hazard problems, although these were solved with group lending. The microfinance model was highly flawed as demonstrated with its many critiques ranging from high interest rates to multiple lending by MFIs to the borrowers. However MFIs are under modification, with legalisation and sanctions being drawn up to prevent the exploitation of the poor from occurring in the future. Microfinance is still successful as it is a means of expanding credit access to those who are deemed un-creditworthy by formal institutions and who would otherwise be forced to rely on exploitative informal institutions like moneylenders and pawnbrokers. The establishment of MFIs in developing countries is a step in the movement towards universal financial access for the poor.
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