Globally, all economies rely upon the financial intermediary function to transfer resources from savers to investors. In market economies, this function is performed by commercial banks and the capital markets. More widespread financial intermediation, as well as increasing depth and variety, are a hallmark of advancing development.
However, in many developing countries, capital markets are still at a rudimentary stage, and commercial banks are reluctant to lend to the poor largely because of the lack of collateral and high transaction costs. The poor would borrow relatively small amounts, and the processing and supervision of lending to them would consume administrative costs that would be disproportionate to the amount of lending.
However as microfinance institutions (MFIs) grow in many countries worldwide, debate continues over whether such programs truly benefit the poor.
Proponents emphasize the need for innovative ways to provide poor populations access to financial services. Critics argue any successes may be temporary because microfinance programs require training and entrepreneurship skills, which many poor populations lack. In addition, some fear that beneficiaries may be charged high interest rates or become dependent on MFIs, borrowing more than they can pay back and becoming further trapped in poverty.
The most crucial requirement is to perceive microcredit lending as part of a comprehensive programme of support to the small enterprise sector.
Microcredit accounted for a 10 percent or morereduction in rural poverty in Bangladesh and other developing countries —meaning MFIs lifted some from the ranks of the poor.
Microcredit also helped to diversify borrowers’ economic activities, boosting incomes in the process. Household income grew over the study period, driven by rising non-farm income. Better access to credit was found to be a key factor in promoting this shift and the following are required to make it impactful on the rural economies:
- Lower interest rates: MFI interest rates are much lower than those charged by informal moneylenders, they still have room to reduce rates further while realizing sufficient returns and strictly monitored by the every government; review national legal, regulatory and institutional frameworks that restrict the access of people living in poverty, especially women, to credit on reasonable terms; to promoting realistic targets for access to affordable credit, providing incentives for improving access to and strengthening the capacity of organized credit systems to deliver credit and related services to people living in poverty and vulnerable groups.
- Improve skills and marketing opportunities for the poor: Credit alone cannot boost productivity, sustain rising incomes and reduce poverty. Poor populations need skills training and better marketing networks to expand their busines activities into more lucrative sectors.
- Encourage more competition among MFIs: Competition will create room for option and improvement in the sector. It could lead to the closure of smaller MFIs or their merging with larger MFI’s to create a stronger structure in the sector.