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2013 DQ 62 (2013)
Microfinance: Dreams and Reality

handle is hein.journals/doveq2013 and id is 68 raw text is: Microfinance: Dreams and Reality Katherine Helen Mary Hunt* 1. Introduction The inequality in global wealth and access to social resources is one of the most discussed issues in the world today. The development of global social morals1 has resulted in the formalization of political and cultural goals towards equality and fairness. Despite the ration- ality challenges these morals pose to traditional econo- mists, the efficient achievement of socially based moral goals via regulation has wide-ranging effects, including effects on financial inclusion in developing countries.2 The fact that most of the world's population does not have access to a social safety net or a formal banking sys- tem has led to the development of microfinance to fill this gap in services.3 Microfinance has seen exponential growth over the last twenty years because of its ability to provide the poor with capital to facilitate income gener- ating self-employment activities and to smooth con- 62 sumption expenses.4 This has effectively mobilized household savings and encouraged emerging small-scale entrepreneurs,5 which have a potential effect on eco- nomic growth because the impetus to achieve economic growth needs to come from within the developing coun- try, not be imposed from the outside.6 This concept is congruent with microfinance, which has the potential to enable economic growth if regulated efficiently, by pass- ing external aid and internal political issues in the pro- cess. It is important to understand that those in poverty have had access to finance prior to the emergence of MFIs through traditional money lenders (TMLs). Loans through TMLs such as banks were rarely approved because of the high transaction costs associated with small loans, no collateral, no credit history, or no busi- ness plan7 and those through loan sharks, which may have had extortionately high interest rates and the possi- bility of physical harm in the instance of late or non- payment. Given the emergence of MFIs to fill this gap in financial services, there is little information as to how * Erasmus University Rotterdam, Rotterdam Institute of Law and Eco- nomics. 1. Linklater 2007. 2. Augsburg et al. 2012; Gibson & Tsakalotos 1994. 3. Sharma 2005. 4. Ahlin & Jiang 2008. 5. Rogerson 2001. 6. Collier & Dasgupta 2007. 7. Shankar 2007; Sharma 2005, p. 1337 and p. 295, respectively. MFIs are regulated and the subsequent effect on eco- nomic development. Microfinance is a topic of research, popular in the exist- ing literature because of the potential wide-ranging and long-lasting effects on a majority of the poor people on Earth. However, there is little empirical research that focuses on the economic benefits of microfinance. This is due to sample selection bias, i.e. it is not possible to compare borrowers from MFIs and those who do not borrow.8 However, various authors have found direct social benefits from microfinance programs.9 In addi- tion, authors have found that microfinance has the potential to reduce individual and regional poverty lev- els.10 However, the requirements for development to be achieved at a micro and macro level require not only microfinance, but also savings of the resulting profits.11 Ahlin and Jiang12 have gone so far as to say that micro- finance will have no effect on GDP unless there are long-term saving patterns by borrowers. The research on the socioeconomic benefits of microfinance will be reviewed in more detail in the coming sections of this article. In contrast, the World Bank has found that most micro- finance is used to meet basic needs (such as housing and food) rather than to generate income via investment activities.13 In addition to this, critics of microfinance generally comment on the mechanism not meeting the needs of the bottom of the pyramid chronic poor14 and does not actually reduce poverty at all.15 It is clear from the literature that there are a number of factors that affect individual and regional outcomes, which are not limited to microfinance such as agricultural cycles and government policy.16 The equivocality of the research findings regarding the socioeconomic benefits of microfinance provides motivation for: clarifying the origins and current situation of microfinance and estab- lishing the areas where future research would be of most benefit. This article contains a positive analysis that seeks to describe the microfinance environment in terms of establishing success benchmarks and determining the empirical findings regarding success or failure to date. 8. Aggarwal etal. 2012. 9. Affleck & Mellor 2006; Cabello 2008; Hossain & Knight 2008; Husain 2008; Mayoux 1999; Molyneux etal. 2007; Roper 2005; Sharma 2005. 10. Emeni 2008; Hossain & Knight 2008; Mogale 2007; Mwenda & Muuka 2004; Sharma 2005. 11. Opoko et a. 2009; Rogerson 2001. 12. Ahling & Jiang 2008. 13. The World Bank 2003. 14. Hartungi 2007; Molyneux et a. 2007; Roper 2005; Sykes & Quesen- berry 2009; Webb et a. 2009; Weiss et a. 2003. 15. Rogerson 2001; Zeller & Meyer 2002. 16. Baulch & Hoddinott 2000; Mwenda & Muuka 2004; Sharma 2005. DQ June 2013 I No. 2

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