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Home»World common»Research Chapters»Social impact of microfinance
Research Chapters

Social impact of microfinance

ReikiomBy ReikiomSeptember 9, 2022Updated:September 9, 2022No Comments5 Mins Read
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Nowadays, the effectiveness of microfinance as a mechanism to combat poverty is much debated as due to the rapid growth in the microfinance sector, microfinance institutions in various countries are facing the problem of consumer over-indebtedness and repayment problems (Attanasio, Augsburg, & Haas, 2015). The social impact of the microfinance programs is much debatable since some researchers argue that microfinance generates positive results and can be used as a development tool to combat poverty while some argue that microfinance generates negative impacts. Mixed arguments also can be seen in the previous literature. For example, Guerin et al.(2009, as cited in Hossain,2013) introduced microfinance as a ‘ double-edged sword’ as it can either reduce financial vulnerability or increase the debt burden of the borrowers and fall them into a debt trap. Hossain (2013) and Schicks (2013) stated that the contribution of microfinance to combat poverty and its social orientation is under much criticizes, an illusion, and public awareness also has increased due to the nature of exploitation of customers in the service of profits and the over-indebtedness. The contribution of microfinance programs to combat poverty is questionable and the contribution is also different among the countries around the world and also from rural to poor (Samer, et al., 2015).

 

As examples of the positive impacts of microfinance, the provision of microloans contributes to alleviating poverty by motivating the poor borrowers to engage in productive economic activities which can lead to enhance the income level (Ihugba, Bankong, & Ebomuche, 2013). Further, Ihugba et al (2013) stated that microfinance is used as a key development strategy for promoting poverty reduction/eradication and economic development, and also can effectively address material poverty, physical deprivation of goods and services, and the income to attain them by granting financial services to whom that are ignored from the mainstream formal financial sector. Microfinance facilities can contribute to increasing the income level of borrowers through either enhancing the number of investments in income-generating activities or diversification of the income sources and further, can offer support to accumulation of assets, smooth consumption, reduce vulnerabilities due to illness, natural disaster, and crop failures and enhance the health, education status and the housing conditions of the borrowers (Hermes & Lensink, 2011). Microfinance plays a considerable role in poverty alleviation and also in the economic development of the poor people in rural areas (Das, 2014).

 

Also, microfinance programs have been able to uplift the well-being of low-income poor people, more likely women, and also succeeded in creating new job opportunities for women especially those who have low educational qualifications and, all in all, microfinance provide opportunities for women to contribute to the economic development (Samer, et al., 2015) The study carried out by Hossain (2012) in Bangladesh attempted to assess the social impact of the microfinance facilities in terms of sanitation conditions of the poor people, education, nutrition and the health levels of the children of the families, access to potable water, and the financial planning. The study showed that the sanitary condition of the poor borrowers showed a high increase as 100 percent of the borrowers were able to have sanitary toilet facilities and, the figure before joining the microfinance facilities was only 39 percent. Further, the impact of microfinance on primary education showed as moderate, as after accessing the credit facilities, the rate of illiteracy decreased to 3 percent from 23 percent and, there was no considerable impact on the secondary education or the above qualifications. Finally, the impact on health, nutrition, and family planning was not considerable and significant. Asian Development Bank (2007, as cited in Sultani, & Chandrashekhar, 2011) showed through their research in Bangladesh, Philippines, and Uzbekistan that, microfinance programs can enhance the women’s status through earning a higher amount of cash, settling significant expenditures, and also saving engagements and, the study concluded that microfinance programs provide access to become more financially independent, develop skills, and enhance the decision-making powers. Microfinance programs have succeeded in generating employment opportunities and also enhancing the earnings of entrepreneurs (Sultani & Chandrashekhar, 2021).

 

            Research carried out by Augsburg et al. (2012) among the microfinance clients in Bosnia and Herzegovina mentioned that they could not able to find an increase in the households’ incomes or the profits from the business enterprises and with that observation they stated that they do not have any direct perception about the alleviation of the poverty by the micro-credit facilities and they showed that there was no enhancement among the poorest borrowers in the sample which they have observed. They further claimed that business ownerships only raised among the clients who have good higher education.

 

Microcredit can create opportunities for poor people in utilizing their money and with that, they are more likely to improve their income and reduce the vulnerabilities they have to face. However, it is believed that microcredit does not generate positive results for all the groups and, especially poor people who engage in a low amount of income-generating activities are poorly developed and, because of the shocks which are beyond their control like sickness and natural disasters, lack of the required skills and knowledge or taking of bad and inappropriate decisions, most of the borrowers face difficulties in settling the debt obligations on time (Hulme, n.d).

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