Introduction Of Microfinance
Microfinance is the provision of a broad range of financial services like savings, loans, insurance, leasing, money transfers, and other services to low-income micro-enterprises and households (Bakhtiari, 2006). Microcredit programs extend small loans to poor people, mainly those who have less access to mainstream financial services due to various constraints. Due to the lack of the collateral to secure the loans from the mainstream financial institutions, more than 80 percent of the developing countries’ households have failed to gain access to institutional banking services (Olusanya, Olumuyiwa, & Oluwatosin, 2012). Microcredit programs are used as a tool worldwide to reduce poverty by enhancing the living standard of rural households. Currently, many microfinance companies have emerged when compared to the past decades all over the world. Professor Mohammad Yunus initiated the concept of microcredit by initiating Gramin banks by offering small loans to rural poor people in Bangladesh and with that, many developing countries took a step forward to combine the microfinance mechanism into their financial system through starting the microfinance institutions (Priyankara & Sumanasiri, 2019).
Microcredit programs are used as a tool worldwide to reduce poverty by enhancing the living standard of rural households. However, there are many arguments about the impact of microfinance on poverty reduction, and its contribution as a development tool is debatable. Nowadays, with the rapid growth of the microfinance sector, the effectiveness of microcredit programs as a tool to fight against poverty is much debated as microfinance institutions in many countries are struggling with client over-indebtedness and repayment problems (Attanasio, Augsburg, Haas, Fitzsimons, & Harmgart, 2015). A study by Islam, Nguyen, and Smyth (2015) introduced microfinance as an important vehicle that could be used to combat rural poverty. They showed that microcredit could offer new business and investment opportunities for poor households and enhance their income and savings. However, On the other hand, their study further concluded that in the long run, poor microfinance borrowers might fall into a vicious circle of debt or over-indebtedness due to the cross financing and continuing increase in the informal borrowings.
Research by Khandker and Samad (2013) also supported that microfinance programs have succeeded in reaching poor people and mainly the women who are unable to get access to mainstream financial institutions and however microfinance programs are not successful in reducing poverty, and its ability is debatable. All in all, there are many arguments about the impact of microfinance on poverty reduction and its contribution as a development tool is debatable and to answer to the over-indebtedness and the debt trap, microfinance institutions should need to design microfinance programs to better target households who are exposed to the vicious debt circle (Islam, Nguyen, & Smyth, 2015).