Essay On Microfinance

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Microfinance is that a small loan lends from an institution to a poor person who might not have collateral, which aims to help them to escape from poverty (The Economist, 1998). However, whether this goal will be realized or not is controversial. This essay will attempt to argue that although the application of microfinance may have defects, it cannot be denied that it is a useful method to alleviate poverty. In order to demonstrate this, it will be shown that argument made against microfinance regarding firstly the high interest of it which leads to increasing suicide rate and secondly the high risk of microfinance may not be true. Meanwhile, several evidence will also be given to prove the advantages of microfinance.

One of the reasons why people hold a negative opinion on microfinance is that the interest rate which is 20%-30% is considered to be exorbitant (The Economist, 2000). Meanwhile, it is reported that 57 people committed suicide due to microfinance (The Economist, 2000). However, this was denied as microfinance institution (MFI) has not put any pressure to those people and there is no evidence that can prove the suicide is correlated to microlending (The Economist, 2000). Besides, The Economist (2000) states that the governments have pushed forward the policy to control the MFIs and restrain the interest rate so that the progress of microfinance is on the right track.

Another reason that people suspect whether microfinance can help to reduce poverty is the high risk of it. According to The Economist (1998), the main idea of microfinance is to offer the poor a small loan without their credit or pledge under which the MFIs may have the risk of not receiving the money back and going bankrupt. In addition, due to lackin...

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... each year’ in Bangladesh because of microfinance (The Economist, 2009). Even though there is no evidence which can verify that microfinance will absolutely reduce the poverty around the world, it is believed that there can be positive influence on poverty if more time is given.

To sum up, it seems clear that microfinance will decrease the poverty to a certain degree though there are still many improvements which should be made. For example, the interest rate of micro lending seems to be too high; however, this situation is under control because of the involvement of government. It is also true that this is risky for those MFIs involved, but the evidence shows the low default rate. Despite the fact that there is lack of direct proof of the effectiveness of microfinance, it is believed that microfinance can reduce the poverty as the evidence has been demonstrated.
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