Microfinance And Weaknesses

Rogaly (1996) finds five major faults with MFIs. He argues that:

• They encourage a single-sector approach to the allocation of resources to fight poverty,

• Microcredit is irrelevant to the poorest people,

• An over-simplistic notion of poverty is used,

• There is an over-emphasis on scale,

• There is inadequate learning and change taking place.

Wright (2000:6) states that much of the doubt of MFIs stems from the argument that microfinance projects “fail to reach the poorest, generally have a limited effect on income, drive women into greater dependence on their husbands and fail to provide additional services desperately needed by the poor”. further, Wright says that various development practitioners not only find microfinance inadequate,

They state that governments and donors should know whether the poor gain more from microfinance, than from more health care or food aid for example. Therefore, there is a need for all involved in microfinance and development to ascertain what exactly has been the impact of microfinance in combating poverty.

Considerable debate remains about the effectiveness of microfinance as a tool for directly reducing poverty, and about the characteristics of the people it benefits (Chowdhury et al, 2004).

Sinha (1998) argues that it is notoriously difficult to measure the impact of microfinance programmes on poverty. This is so she argues, because money is fungible and therefore it is difficult to isolate credit impact, but also because the definition of ‘poverty’, how it is measured and who constitute the ‘poor’ “are fiercely contested issues” (1998:3).

Poverty is a complex issue and is difficult to define, as there are various dimensions to poverty, for some, such as World Bank, poverty relates to income, and poverty measures are based on the percentage of people living below a fixed amount of money, such as US$1 dollar a day (World

The financial market fails to provide access to poor. The high cost of small scale lending are constraint to poor to access to formal finance, this push them to informal financial sector or to the extreme financial exclusion. When the access to financial services is improved, this enables to build up productive assets (Kirk Patrick, 2006).

Microfinance institutions may correct the market failure left by formal baking system and help small businesses to access fund and creates economic growth and lifting poor out of poverty.It is normally asserted that MFIs are not reaching the poorest in society. However, despite some commentators’ disbelief of the impact of microfinance on poverty, studies have shown that microfinance has been successful in many situations.

Mayoux (2001: 52) states that while microfinance has much potential, the main effects on poverty have been:

• Credit making a significant contribution to increasing incomes of the better-off poor, including