The current paper is devoted to describing the comparison between the two microfinance articles provided and the current micro-financial institutions. When conducting this comparison, basic elements of microfinance, basically those of the finance discipline are highlighted and are realized to be present in both the articles. In essence, both the articles expose the finance academic community to microfinance institutions and microfinance disciplines. As well, the issues relating to microfinance institutions’ sustainability, management practices, product and services, regulation and policy, and clientele targeting are assessed.
Microfinance constitutes various institutions and range from individual money lenders to formal financial institutions like the credit unions, village banks, financial cooperatives and specialized SME funds. Globally, the poor have been excluded from formal financial systems. In effect, they have developed conclusive community based financial measures to meet their funding needs and to alleviate the vicious poverty (Sengupta and Aubuchon 2008). Consequently, a good number of formal sector institutions, like those of governments and non government, have been established to solely for combating poverty and for solving the poor’s financial needs. Microfinance institutions’ products currently continue to be investments, lending, as well as management of risk of insurance. However, these products are offered in form of microcredit, micro-savings or micro-savings (Sengupta and Aubuchon 2008).
It is however significant from the two articles that microfinance is simply a term that reflects the formal and the informal provision of the poor with financial services. Even though the motivation behind microfinance institutions is the alleviation of poverty, it is significant from the articles that reaching the poor with microcredit definitely establishes a sustainable social and economic development route animated by the poor (Brau and Gary 2004). It is asserted that the positive long run development of microfinance remains controversial even though it generates positive outcomes in the short run. Therefore, microfinance is currently interpreted as a powerful institutional barrier to sustainable social and economic development as well as to the reduction of poverty.
Microfinance is currently perceived as a barrier to sustainable economic development. This is currently supported by negative issues relating to its role in scale economies, the problems of fallacy of composition, as well as the need to promote vertical and horizontal connectability. Besides, the failure of microfinance to meet the financial gaps in the financial markets stands out as how it acts as a barrier to sustainable economic development (Morduch 2000). Microfinance institutions have created a lot of problems that are against development and poverty alleviation. For instance, it has made banks incur huge transactions cost for very loan when loaning to small scale users. It is as well difficult to determine the riskiness of potential borrowers (Sengupta and Aubuchon 2008). As well, a good number of low-income households have no access to assets to pledge as collateral. These have generally made the achievement of social and economic sustainable developments difficult.
Currently, microfinance institutions mostly refuse to register crucial importance of scale within any sector. In effect, microenterprises develop little survival chances within its own locality and hence higher turnover in microenterprises. Besides, the oversupply of ineffective microenterprises currently undermines the development of more effective small and medium enterprises (Morduch 2000). These failures generally stem from the microfinance institutions disregard of the crucial role of the scale of economies.
Also, not only do the households require cheap credit, but they as well need access to full credit if sustainable development and poverty alleviation are to be accomplished (Brau and Gary 2004). Currently, it is evident that rising costs on financial services do not reduce demand. Raising interest rates does not substantially diminish demand for loans. In the microfinance context, this statement holds. Since moneylenders ask for higher interest rates, microfinance institutions can as well (Brau and Gary 2004). However, low income households can still borrow from money lenders to meet their short-lived consumption needs as opposed to making long term sustainable productive developments and investments.
Microfinance institutions offer lower interest rates when compared to local money lenders. This is due to their efficiency in monitoring and screening borrowers. In fact, this is connected to the existence of economies of scale and the usage of joint liability mechanisms of lending (Morduch 2000). Consequently, the microfinance institution’s cost of lending is lowered comparative to those of moneylenders. Basically, this has enabled microfinance institutions to offer loans at lower rates to the poor than money lenders and this enables more borrowers get into the credit market simply for reduced cost of finance and welfare enhancement (Brau and Gary 2004).
The establishment of group lending or joint liability contracts has currently made the microfinance institutions succeed. Microfinance institutions have continued to use varied lending techniques like progressive and dynamic loans, frequent repayment schedules as well as non-traditional security to ascertain higher repayment rates to the poor.
Also, major highlighted issue in the literatures in the existing microfinance institutions is simply choice between providing individual loans or group loans. It is significant that current microfinance institutions heavily rely on social collaterals for the loan to be secured by loan groups. Although group loans make up the bulk of microloans worldwide, individual lending is significant in some areas and is growing in popularity (Morduch 2000).
Credit scoring in microfinance institutions adds value to the current microfinance institution processes (Morduch 2000). The current techniques that microfinance institutions use to reduce arrears constitute formation of strong solidarity groups, quick loan follow-ups, formulation and updating of loan policies as well as laying emphasis on the scope of lending.
Works cited
Brau, J. C. and Gary M. W. Microfinance: A Comprehensive Review of the Existing Literature. Journal of Entrepreneurial Finance and Business Ventures, 9(1), 2004. Web. 11 March, 2012.
Morduch, J. The Microfinance Schism. Journal of World Development. 28(4), Great Britain. 2000.
Sengupta, R. and Aubuchon, C. The Microfinance Revolution: An Overview, 2008. Web. 11 March, 2012.
The two given case studies.
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