One of the great hopes was the provision of 'microfinance' to small businesses in third world countries.
The problem of many LDC's is a lack of saving and capital. This is a problem for larger firms who cannot borrow the funds they need to grow. However most people in LDC's are hampered because they cannot establish their own small businesses, they too lack the necessary capital.
Of course small businesses, usually just employing one person, need far less capital to establish themselves. In the UK and other developed countries small businesses would go to the bank to obtain funds, but LDC's simply don't have the financial infrastructure for this.
Most people in LDC's don't have bank accounts and bank branches cannot be found in each village or even each high street.
Microfinance was an innovation that allowed ordinary people to obtain small loans to set up their own business. It partly relied on the goodwill of western donors but great things were claimed for it. It gave the chance for many to earn their own living and begin the overall raising of the standard of living in many areas of LDC's never helped by large development projects and multinational firms investments.
Now it seems that much of the optimism for this was a fallacy. This is devastating news for many. The Guardian article below gives details
Lara Hogan
ReplyDeleteIn my opinion it was naive to even contemplate the fact that it might be possible to reduce poverty with microfinance. The world’s poverty is so widespread that such a policy might aid a few lucky family’s but it hardly going to help those who have absolutely nothing; there is a huge amount of poverty in say, Africa where people are so poor and weak that all their efforts are put into gathering food and water and often it is the children who are left to do this after the death or illness of parents. These people hardly have time to start a business to help their situation in the place they live where the potential consumers have little money to buy the product, nor does this policy take into account the fact that these people, even if they are given the money, do not have the education to run a business and few are born with natural business minds.
Microfinance is also flawed in that few western firms are going to be willing to invest their money into weak prospects across the world in the current economic climate when they have such little security themselves. It also relies on the goodwill of firms who are frankly more interested in furthering their own business. And even if they do invest it is likely to be coupled with high interest rates which have the potential to drop the poor further into poverty.
In order for microfinance to be able to work, the overall economy of LDC’s need to be enhanced in order to provide an infrastructure for microfinance. By doing this, these small new businesses will have stable banks supported by a stable government who can provide capital at fair interest rates. By having this infrastructure developing countries will also be better equipped to help themselves face the problem of poverty rather than relying on the developed world.
The upside to microfinance is that the money goes directly from large western firms to the small potential business’ which means that the funds are not getting lost on the way, through administrative costs as it does with many charities trying to reduce poverty.
I personally think this is a fantastic idea, because larger firms in these third world countries aren't able to obtain funds to aid growth and positively impact the economy in these less developed countries; we should focus on smaller businesses, helping individuals obtain/start up a small business and financially aiding those who have already got small businesses by providing capital (which we are able to provide because significantly less is needed to help, rather than a large firm) and this would cause a gradual positive impact on the economy, as the numbers of smaller businesses increases and they would make significant revenue and this would pay employers directly and fairly. In addition, if we were to consider providing these small businesses with capital rather than money, it would counter out the problem of these less developed countries not being able to save capital goods; they could directly sell the products for money and this would help stable these less developed countries financially.
ReplyDeleteOf course there are several negative aspects of microfinance like high interest rate on loans and the possibility of business failure. However, I think it will be a mistake if funding to microfinance is stopped as far as poverty alleviation is concerned.Obviously m icrofinance will not definitively end all poverty in LDC's but it can go a long way in helping the issue, if we can try to build up an ecosystem, where high interest can be avoided and the whole system works effectively.
ReplyDeleteLily Tuhey
ReplyDeleteIn my opinion whilst microfinance is overall a good idea, the flaws cannot be ignored. For most people that use microfinance there is either no alternative or loan sharks which already have an extortionate rate of interest. The idea of microfinance is a relatively new idea and whilst the success of such a business venture cannot be guaranteed, it is at least a fresh attempt at combating the problem of poverty. In many countries throughout the world, both the government and privately owned firms are interested in funding financial aid to the poor. As the worldwide understanding of poverty develops and new ideas of helping are introduced, people offering financial aid will continue to support those in poverty, with more funders emerging every day. Gun Keshari has become a regular borrower of microfinance and with the support of small, low-interest loans, has managed a dramatic improvement in the living standards of her family.
However, microfinance doesn’t work for everyone. The idea is that low-income individuals are capable of lifting themselves out of poverty if given access the financial aid. Therefore when high interest rates are charged on the borrowed money, those from low-income families cannot afford to pay it back. Reports of skyrocketing interest rates has caused some people such as Sikiratou Salami from Togo, who took out a loan to purchase supplies for her cosmetics business and use her profits on her children’s education, to not be able to afford the initial interest rates until her business is off the ground. Though this is not to say all microfinance organisations are charging extravagant interests rates. There is indeed a mixture and the microfinance institute (MFI), provides microfinance services, from small non-profit organisations to large commercial banks.
However, microfinance has been reported as having negative effects on a lot of people. There have been some suicides in Andhra Pradesh, India from borrowers who could not pay back their loans. Many have also claimed that the transaction cost of microfinance is not proportional to the amount borrowed. On top of this there has been a case of increased child labour used by small self-employed owners, who due to microfinance want to set up a business but can only afford to pay below minimum wage and so use children.
Overall, whilst the foundation of the idea of microfinance is really good and at least people are aware of the problem of poverty and are trying to come up with ways to stop it. The practical side of enforcing it and ensuring that it works and is beneficial to those involved as well as those affected by it, needs a little more work.