Academic journal article IUP Journal of Management Research

The Growth of Microfinance and the Role of DSS in Reducing Its Volatility

Academic journal article IUP Journal of Management Research

The Growth of Microfinance and the Role of DSS in Reducing Its Volatility

Article excerpt

Introduction

All the institutions which share a commitment to serving clients with low-incomes that have been excluded from the formal banking sector are part of the microfinance industry (Morduch, 1999). The Consultative Group to Assist the Poorest (the apex association of international donors who support microfinance) regards microfinance as "a powerful tool to fight poverty" that can help poor people to "raise income, build their assets, and cushion themselves against external shocks" (Copestake, 2007).

Microfinance-financial services tailored to the poor (Despallier et al., 2011)- spans a range of financial instruments including credit, savings, insurance, mortgages and retirement plans, all of which denominated in small amounts (Khavul, 2010). Historically, efforts to deliver formal credit and financial services to the rural poor in developing countries have failed. The recent proliferation of innovative microfinance programs has been inspired largely by the belief that such programs reach the poor and have a positive impact (Coleman, 2006; and Mallick, 2012).

MFIs have reached well over 100 million clients and achieved impressive repayment rates on loans (Cull et al., 2011). Because of the increase in the scale of operations, the concept and practice of microfinance have changed dramatically over the last decade and microfinance is increasingly adopting a financial systems approach, either by operating on commercial lines or by systematically reducing reliance on interest rate subsidies and/or aid agency financial support (Imai et al., 2010). A few MFIs have implemented best business practices and made transition to fully regulated financial institutions. Many more are in the process of undertaking this transformation or at least considering it (Tucker, 2001). Some advocates of innovation say transformation from non-profit to commercial enterprises is the only way to go. It is further believed that this commercialization approach will increase MFIs' operational efficiency, sustainability and the outreach, and decrease the dependency on the donor agencies (Floque et al., 2011).

A Brief Overview of Microfinance Industry

Importance of Microfinance Industry

The importance of microfinance industry in achieving the Millennium Development Goals as well as national policies that target poverty reduction, empowering women and improving standard of living, is that it acts as a flexible development tool, permanent and widespread (Asiama, 2007; and SAVESCU, 2010).

In the study entitled "Is Microfinance an Effective Strategy to Reach the Millenium Development Goals?", Elizabeth Littlefield, Jonathan Murduch and Syed Hashemi, state :

Studies of global or regional level among the millions of customers of microfinance institutions show that the access to funding sources has allowed the poor to increase household and family income, to purchase goods and to reduce the impact that certain unforeseen events may have on them. (SAVESCU, 2010)

However, some of the authors have argued that microcredit is not a panacea for poverty-alleviation and that in some cases the poorest people have been made worse-off (Asiama, 2007).

This notwithstanding, the UN declared 2005 to be the International Year of Microcredit (Hermes and Lensink, 2007). Microfinance is also seen by the European Union as a tool of economic growth and social cohesion (SAVESCU, 2011).

Evolution of Microfinance Industry

During the post-colonial period, subsidized agricultural credit had been considered an appropriate development strategy to reach the poor. Most of the governments had followed this strategy with relaxed requirement for collateral and subsidized interest rate. Over the years, this particular approach seemed to be failing due to high transaction costs, high default rates and corrupt practices. This resulted in the phenomenal growth of informal financial markets.

The experience of formal and informal financial markets has highlighted the gap in terms of methodology and approach to reaching out to the poor, particularly in developing countries. …

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