THE IMPACT OF MICROFINANCE ON POVERTY REDUCTION AND ECONOMIC
GROWTH.
1. INTRODUCTION
1.1 Background of the study
Microfinance deals with the provision of financial services, such as loans, savings, insurance,
money transfers, and payment facilities to income groups in the lower cadre, (Awojobi,
2014). It could also be used for productive purposes such as investments, seeds, or
additional working capital for micro-enterprises. On the other hand, it could be used to
provide for immediate family expenditures such as food, education, housing, and health.
Microfinance is an effective tool for the reduction of poverty and economic empowerment
for poor people (Ayoade & Agwu, 2015). Microfinance is no longer an experiment or a wish,
it is a proven success. Anyanwu (2004) stressed that Microfinance may not be able to solve
all the problems of the poor, but it certainly puts resources in their hands in order for them
to live an enhanced standard of life. Microfinance has shown that poor people can be viable
customers if properly focused. No doubt Microfinance has strongly attracted the interest of
private sector investors.
However, the following challenges, among others, face Microfinance institutions: They scale
of financial services to the poor should be increased by microfinance banks; they need to
reach out and seek the poor wherever they are and give them access to finance. The
Grameen Bank of Bangladesh has set a good example in this direction by allowing credit
and other services to cost less for the poor and train staff to be uniquely suitable to
Microfinance business. The latter enhances efficiency and sustainability of the sector; and
develops tailored products to meet the needs of their clients the poor, (Ayoade & Agwu,
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2015). Poverty is a complex and multidimensional phenomenon. It is widespread and
pervasive. Income poverty is considered as deprivation, low education, fragile health
including reproductive health, low nutrition and unemployment, and weak social and
political participation. These are supplementary elements of the deprivation of capability and
empowerment (Senayake, 2002). A study argued that the measurement and the
examination of the characteristic causes of poverty at household levels is an important input
into the design of economic policy and poverty reduction( Aryal, 2007).
Poverty has become an international agenda, and the world leader has committed to social
development to address the problems of poverty in the twenty-first century. Recently
continuous efforts were made for reducing the large proportions of people living in extreme
poverty. Microfinance is a type of banking service that is provided to unemployed or
lowincome individuals or groups who would otherwise have no other means of gaining
financial services. Microfinance is a source of financial services for entrepreneurs and small
business lacking access to banking and related services, which helps to low-income people
including women, who are deprived from economic activities. It helps to those people in the
society who have no access to take financial from the commercial banks because
commercial banks provide the large amounts of loans for high-level and income areas with
some mortgagees. The low-income people do have not any property to keep the mortgagee
to take loans from commercial banks. Microfinance is one of the appropriate mechanisms to
identify the poor and disadvantaged communities and to address poverty by providing
income, employment and capacity-building opportunities to the poor, disabled, dalits,
marginalized groups, and destitute including women and their socio-economic
empowerment with the support of social mobilization (Shrestha, 2007).
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Poverty in Nepal is overwhelmingly a rural characteristic. We have to be clear that without
proper looking of the basic characteristics of the individual and/ or group of individuals and/
or household level, no further achievement can be made in the reduction of poverty. Nepal
has more than 50 year of development experience. The past development history has
shown that poverty reduction constitutes the precondition for the overall development of
the country. Without enabling those people living under the poverty line to participate and
involve spontaneously in decision making process on every issues concerning themselves by
increasing their per capita income, providing them with income-generating opportunities,
Nepal’s development process cannot be achieved smoothly. The consumption of goods and
service such as people’s basic and primary needs like food, clothing, shelter and health,
education etc, depend upon their purchasing power. And, these are the prerequisites for
infrastructure development such as construction, road, irrigation, electricity etc, which is
one of the indicators of level of development in the country. 3 Microfinance is related to the
supply of loans, savings, and other basic financial services to poor people living in poverty.
Financial services needed by the poor include working capital loans, consumer credit,
savings, pensions, insurance and money transfer services through the formal financial
sector. Poor people are fulfilling their need of financial services through a variety of financial
services, mostly through informal credit which is available from informal commercial and
non-commercial money lenders, usually at a very high cost to borrowers (Imran, Zaheer &
Saif, 2011)..
Likewise, saving services are available through a variety of informal relationships like saving
clubs, rotating savings and credit associations, and mutual insurance societies that have a
tendency to be erratic and insecure providers of financial services to the poor. Such
institutional arrangements. These services are not sufficient to fulfill the requirements of the
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poor. This includes the service from donor-supported, non-profit, non-governmental
organizations (NGOs), commercial and state banks; insurance and credit card companies;
wire services post offices; and others. But the experiences gained during the past 1980s,
and 1990s have shown that the poor are creditworthy, they are sincere and they repay their
loans and are willing and able to pay interest rates that cover the costs of providing such
loans. According to the United Nations microfinance” is defined as the provision of small
scale financial services such as savings, credit, and other basic financial services to poor
low-income people. The term “microfinance institution” now refers to a wide range of
organizations dedicated to providing these services and includes nongovernmental
organizations, credit unions, co-operatives, private commercial banks non-bank financial
institutions and parts of state-owned banks Financial services for the poor have proved to
be a powerful instrument for poverty reduction that enables the poor to build assets,
increase incomes and reduce their vulnerability to economic stress. However, with nearly
one billion people are still lacking access to basic financial services especially the very poor.
1.2. Specific Objectives
1. To critically review theories of poverty reduction and strategies and the contribution of
microfinance institutions
2. To Establish the relationship between microfinance institutions and poverty reduction
3. To evaluate the effectiveness of microfinance as a tool for poverty reduction.
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1.3. Research Questions
1. what will be the theories of poverty reduction and economic growth and the contribution of
microfinance institutions?
2. what will the relationships between microfinance institutions and poverty reduction and
economic growth?
3. what will be the effectiveness of microfinance as a tool for poverty reduction and economic
growth?
1.3 Statement of the problem (indicating the gap in the research)
Despite tremendous efforts in income growth, human development, and vulnerability reduction
to date, developing countries continue to face serious challenges, with approximately 1.3 Billion
people living below the poverty line. Despite recent strong GNP growth rates, a concerted war
on poverty is important. This is important owing to the rising economic disparity caused by
increased reliance on the corporate market. In the past, majority development strategies led to
poverty reproduction, as well as a quick expansion in the budget deficit, loan reliance, and a
significant decline in natural resources. These developments must result in the community's
horizontal and vertical polarization. As a result, there is an urgent need to review whether the
already operational poverty alleviation initiatives are helping to meet basic requirements and
foster community self-reliance through human resource development and
revenue creation activities.
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2. LITERATURE REVIEW
2.1Empirical Review
Poverty reduction has been a major concern in Malawi for a long time. Today, Microfinance has
become an important instrument for poverty alleviation in developing countries. This paper aims
to assess the Impact of Microfinance activities on Malawi’s economic growth and poverty
reduction. The study findings will be of special importance for policymakers and stakeholders
who may benefit from these results in improving regulations and strategies to strengthen the
microfinance sector as the main player in the financial system in Malawi. For this study, 70
respondents from microfinance institutions were considered and surveyed using a structured
questionnaire and interviews. The data collected is analyzed with tables, percentages, and
diagrams using Microsoft Excel (Dr. G Agila, Elina Chamama Kamfose, 2023).
Microcredit and microfinance have received extensive recognition as a strategy for poverty
reduction and for economic empowerment. Microfinance is a way of fighting poverty,
particularly in rural areas, where most of the world’s poorest people live. Accessing small
amounts of credit at reasonable interest rates gives poor people an opportunity to set up their
small businesses. It shows that access and efficient provision of microcredit can enable the poor
to smooth their consumption, manage their risks better, gradually build their assets, develop
their micro-enterprises, enhance their income earning capacity, and enjoy an improved quality
of life (Dr.Ajit KumarBansal, Ms.AnuBansal, 2012).
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According to (Chintamani Prasad Patnaik, 2022), microfinance seems to have generated a view
that microfinance development could provide an answer to the problems of rural financial
market development. While the development of microfinance is undoubtedly critical in
improving access to finance for the unserved and underserved poor and low-income households
and their enterprises, it is inadequate to address issues of rural financial market development.
It is envisaged that self-help groups will play a vital role in such a strategy. However, there is a
need for structural orientation of the groups to suit the requirements of new business. The
microcredit movement has to be viewed from a long-term perspective under the SHG
framework, which underlines the need for a deliberate policy implication in favor of assurance in
terms of technology back-up, product market, and human resource development. According to
(Hiderink and Kok, 2019), The UN Millennium goal to alleviate poverty by the year 2015 is far
from fetch despite the enormous work that microfinance institutions are doing to contribute in
this domain.
Maksudova, et. al. 2010, It is a well-known fact that one major cause of poverty in developing
countries is lack of access to productive capital, with formal financial institutions mostly
excluding the poor in their lending activities. Since the 1970s, microfinance has played an
important role in decreasing poverty and supporting economic growth. MFIs design optimal
products that distribute funds over macro and micro levels, which in turn contribute to the
growth of financial intermediaries. Following the success of the Grameen Bank in Bangladesh
in reaching the poor, microfinance institutions using group-based lending are increasingly
becoming important institutions in breaking the circle of poverty in many developing countries
today.
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Ledgewood, et. al. 2000, Microfinance has evolved as an economic development approach
intended to benefit low-income women and men. It refers to the provision of financial services
to low–income clients, including the self-employed.
3. Methodology
3.1 Research Techniques
The Research design that the researcher will employ in the study will be descriptive research
with particular reference to the case study method. The study will be conducted to ascertain the
impact of microfinance on poverty reduction and economic growth. The population will consist
of beneficiaries of microfinance from major microfinance institutions in Sierra Leone.
3.2 Questionnaire
A sample size of 60 beneficiaries will be selected based on a purposeful sampling technique
with the help of operation officers of the microfinance institutions. This will help ensure
effective coverage and reduce time spent and cost. The main instrument that will be used for
gathering data will be a structured questionnaire titled ‘’The Impacts of Microfinance on Poverty
Reduction and Economic Growth in Sierra Leone; Evidence from Policy Beneficiaries.’’ Questions
will be structured with the objectives of the study in mind. It will consist of items that will
generate data for answering the research question. The questionnaire will have three sections;
Section A will cover demographic information, and Section B will capture questions on the
objectives that will be established in the research. Section C will concentrate on the impact of
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microfinance based on the specific recommendations and areas of improvement that will be
provided by the beneficiaries. The validity of the questionnaire was confirmed by relying on the
comments of two experienced experts.
3.3 Method of analyzing the result
After collecting the data, both descriptive statistics and econometric tools were employed so as
to investigate the impact of credit on improving the life of the clients. Various statistical tools
were used to investigate the difference in welfare between the clients who have been staying
more than two years in the program and fresh clients. A summary of statistics and tabulation of
field data was used to examine the impact of WMFI’s intervention towards improving the
welfare of the clients. The cross-tabulations could highlight differences in the mean values of
the hypothesized impact variables between frequent borrowers and their counterparts.
3.4 Expected result
The results of empirical evidence will indicate that microfinance will have a very
important role to play in the development of an economy, according to the supporters
of microfinance.
This study will show that microfinance plays three key roles in poverty reduction and
economic growth. Firstly, it will help every poor household meet basic needs and
protect against risks. Secondly, it will be associated with improvements in household
economic welfare and lastly, it helps to empower women by supporting women’s
economic participation and so promotes gender equity and reduces gender disparity.
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4. REFERENCES
1. Ngele, A. N. (2020). Entrepreneurial Development and Employment Creation: A Focus
on Education and Financial Aid as a Sustainable Option for Youths in Nigeria. Journal of
Global Economics and Business, 1(3), 19-39.
2. Taiwo, J. N., Aregan, A. I., & Ailemen, I. O. (2016). Microfinance and poverty alleviation
in Southwest Nigeria: empirical evidence.
3. Kamfose, E. C., & Agila, D. G. (2023). The Impact of Microfinance on Economic Growth
and Poverty Reduction in Malawi. International Journal for Research in Applied Science
and Engineering Technology, 11(4), 933-937.
4. Bansal, A. K., & Bansal, A. (2012). Micro Finance and Poverty Reduction in
India. Integral Review-A Journal of Management, 5(1), 31-35.
5. Ejaz, S. R. (2022). IMPACT OF MICROFINANCE ON POVERTY ALLEVIATION. RIMS
Journal of Management, 6(2), 11-25.
6. Kamfose, E. C., & Agila, D. G. (2023). The Impact of Microfinance on Economic Growth
and Poverty Reduction in Malawi. International Journal for Research in Applied Science
and Engineering Technology, 11(4), 933-937.
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