Student Essay on Microfinance
Announcing the winner of the first AboutMicrofinance student competition, “Making microfinance institutions sustainable – challenges and opportunities”. By Akil Lamy, GLOBE St. John’s University
Microfinance institutions are relatively new financial innovations. Muhammad Yunus and others ushered in fundamental changes in terms of offering banking services to the poor or “unbankable” in the 1970’s. Microfinance is experiencing “growing pains” because it is a young industry, especially if it is compared to commercial banks, saving institutions and credit unions etc. Microfinance institutions are achieving positive growth but some clear challenges are facing the industry. Microfinance advocates must not be deterred by the critics. They should understand the problems that the industry faces while trying to make positive improvements.
Many developing countries and regions can utilize micro lending as a sustainable tool to reduce poverty. Government aid should not be given to the governments of impoverished countries to improve the livelihood of the people. Studies have shown that the aid is not channeled to where it is need the most. Aid should be given to microfinance institutions for distribution to entrepreneurs. Microloan entrepreneurs rarely default on their loan payments; they are proud that they are given the opportunity to start their own businesses. This is an excellent opportunity for people to rid themselves of dependency on the government and state welfare. The people feel the power of self sufficiency through business development and entrepreneurship.
Microfinance institutions are likely to remain viable because there is a large untapped market in both developing countries and developing countries. At least half of the people in the world live on less than two US dollars per day. Microloan interest rates should be kept low across the board; this would allow the institutions to support more new businesses while remaining economically viable. There is a huge demand for non-collateral financing, the law of demand and supply would ensure that interest rates are kept low. There is major opportunity to reduce poverty, create businesses and improve the standard of living without government aid. Microfinance in isolation is not the panacea for poverty reduction but it is a great tool to help rid the world of poverty.
There is little awareness about microfinance in the public domain. Microfinance institutions must develop more awareness about their initiatives. Millions of people worldwide are not aware of what type of services and opportunities are available. This would allow them to reach the people who need the services the most. Educating people about the existence of these institutions is one of the biggest challenges. Many impoverished people believe that they have no hope in getting out of poverty; they were educated to believe that they need collateral to get a loan.
Microfinance institutions have a big ethical challenge to confront. Microfinance stakeholders and advocates must ensure that the original intention of micro lending is maintained. Profitability may be a factor in running these institutions, but it must never become the main factor driving the industry. Stiffer Regulation and ethical codes must be drafted now to avoid a meltdown similar to what happened in commercial and investment banks. Great foreshadowing is needed now to deal with challenges in the future.
Overall, the industry is new and striving and I believe that there is only room for growth and improvement. New young academic minds will become more attracted to Microfinance as a career option. As long as Microfinance never loses its charitable characteristics then the industry should be sustainable for a long time into the future.