Weaknesses and strengths

Weakness

There´s not much research done on the actual effectiveness of microfinance as a tool for economic growth. Some argue that there´s to much focus on microfinance which will motivating less spending in other helping assistances as public health, welfare, and education.

Some are doubting microfinance really have that impact on poverty as the practioners would submit. Other describes microcrediting as a privatization of public safetynet programs. There´s also some microfinance institutions charging excessive interest rates.

Questions against the Grameen Bank was raised in a Wall Street Journal article. It was regarding the repayment rate, collection methods and questionable accounting practices.

Studies of microcredit programs have found that women often act as collection agents for their husbands and sons, such that the men spend the money themselves while women are saddled with the credit risk. Some borrowers have become dependent on loans for household expenditures rather than capital investments.

The key debate about microfinance is weather it should focus on improved welfare or financial sustainability. The two different approaches are usually named as “poverty lending” or “the welfarist approach” and “the institutionist approach” or “financial system approach”. The welfarist approach could be for example supplying the customer with education and health wilst the institutionists focus only on the financial service. The reason for that is only with total focus on financial sustainability the huge demand can be met. MFIs with the welfarist approach are for example the Grameen Bank and Women´s World Banking. Examples of institutionists are ACCION International and BRI Unit Desa.

Strength

The biggest strength is bringing financial services to poor people and making it financial sustainable by the economies of scale effect. In India the National Bank for Agriculture and Rural Development (NABARD) finances more than 500 banks that onlend funds to self help groups (SHG). SHGs comprise twenty or fewer members, of whom the majority are women from the poorest castes and tribes. Nearly 1.4 million SHGs comprising approximately 20 million women now borrow from banks, which makes the Indian SHG-Bank Linkage model the largest microfinance program in the world. Similar programs are evolving in Africa and Southeast Asia with the assistance of organizations like Opportunity International, Catholic Relief Services, CARE, APMAS and Oxfam. Also helps in the development of an economy by giving everyday people the chance to establish a sustainable means of income. Eventual increases in disposable income will lead to economic development and growth.

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