literature review on microfinance and poverty reduction
Mainly this chapter will demonstrate the relevant and available literature that would help to develop a sound theoretical framework that guides the research concept, over-indebtedness of the rural microfinance borrowers. The first section comprises an overview of research variables while the second section will demonstrate the impact of microfinance on over-indebtedness by specifying the inter-relationships among the variables. Further, this review will provide a brief overview of the drivers of over-indebtedness
Professor Mohammad Yunus launched the concept of microcredit by initiating Grameen bank by offering small loans to rural poor people in Bangladesh and with that many developing countries started to combine microfinance into their financial system through installing microfinance institutions (Priyankara & Sumanasiri, 2019). Das (2014) defined microfinance as the “provision of thrift, credit and other financial services, and products of very small amounts to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels and improve living standards” (p.56). Muhammad Yunus is regarded as the founder of the microfinance concept. During the period that Yunus worked in Chittagong University in Bangladesh as an economic lecturer, he observed that the villagers in the Jobra suffered from poverty and also they could not able to raise the working capital at least less than one dollar, and only the option they had was, borrow from money lenders who had unfair interest rates and unfair terms and loan conditions. Initially, Yunus distributed 27 dollars among the 42 very poor people, who needed financial assistance, and after that, he tried to get help from the university bank and tried to persuade them to provide financial assistance to the needy people. However, the bank was not agreed and they rejected to support the poor people. Therefore, Yunus took the first step in 1976, by taking a loan from a local bank and distributed it among the poor individuals in Jobra and with the succession, he distributed loans to many other villages without any collateral, and finally, he created a separate bank after many challenges and hardships named Grameen Bank in 1983. People who need to borrow from this bank needed to join in the form of five-member self-formed groups. At present Grameen model is not only limited to Bangladesh but also has spread in around 40 countries and the first one was began in Malayasia in 1986 (Yunus, 1999). From there, the microfinance programs expanded rapidly all over the world and, at the present large number of borrowers are from rural South Asia, East Asia, and also from the Pacific region (Lutzenkirchen & Weistroffer, 2012).
Moreover, Hossain (2012) referred to microfinance as a “small amount of loans provided by the Microfinance Institutions (MFIs) to poor people to alleviate poverty through their socio-economic development” (p.34) and, even though during the beginning periods, microfinance programs were only limited to provide a small number of credit facilities to the individuals, currently microfinance concept has expanded and microfinance programs have succeeded in introducing many other services like “micro-services, micro insurance, micro-enterprise, and other micro-financial services”(p.34). Further, according to Hossain (2012), nowadays, microfinance institutions have focused their attention mainly not only on the financial problems of the households but also try to enhance the education level, health, and nutrition levels of the poor borrowers and, also empower women and their participation in decision making. Today, in the 21st century, microfinance has become an important part of the global economy due to its rapid expansion across the world and microfinance is appreciable among the beneficiaries as a golden solution for reducing the poverty and building social capital.
Further, Microfinance can be introduced as the provision of a broad range of financial services like savings, loans, insurance, leasing, money transfers, and others to the poor households and micro-enterprises who are not considered from the formal financial institutions and this require innovative delivery channels and methodologies (Bakhtiari, 2006). Further Bakhtiari (2006) has shown that the main reason for the difficulties faced by the poor people when accessing the formal financial services is that the lack of collaterals that are asked by the financial institutions and, also having many bureaucratic procedures which cause additional transaction costs. Because of these things, financial institutions are not motivated to lend money to them, and also poor borrowers are not motivated to borrow from formal mainstream financial institutions. Limited access to financial services is considered a major obstacle for poor households in the process of enhancing their living standards (Kono & Takahashi, 2010) Brett (1999) stated that lack of access to productive capital for rural households has led to creating poverty among those. Microfinance programs mainly target the poor households who have been excluded from the mainstream financial services and the main objective of the formation of the microfinance programs is the servicing those poor households. Examples for microfinance clients are poor, urban, and rural households, micro-entrepreneurs, and low-income self-employed individuals across the world (Gonzalez, 2008).
Microfinance institutions follow a market approach to lend microfinance to poor borrowers to facilitate the poor on a sustainable basis, and to achieve this purpose, microfinance institutions use innovative lending methodologies like group and individual non-collateralized loan methodologies (Hartarska & Nadolnyak, 2007) Microfinance is widely expanded in developing countries other than the developed countries and different types of organizations such as non-governmental organizations, credit unions, and cooperatives, banks, non-bank financial institutions, and self-help groups are involved in providing microfinance services (Gonzalez, 2008) Ihugba et al (2013) stated, the smallness of the loans advanced and or savings collected, the absence of asset-based collateral, and simplicity of operations as main features that distinguish microfinance from other financial services.