MMN323273 Microfinance Theory and Practice

Explanation of the meaning of microfinance

According to Staschen and Nelson (2013) microfinance is usually moderate financial services to both deposits and credits provided to individuals doing small business such as farmers, or those one that operates micro enterprises. It is more than an income generation enterprise. By directly empowering the underprivileged, microfinance is the key driving mechanism that enables small-scale operators in achieving millennium development goals, particularly overreaching the targets of reducing poverty rates and hunger in the world (Bateman and Chang, 2012). In other word, microfinance is usually the set of alternative and innovative financial services created for the underprivileged that have no access to the formal or traditional financial institutions. It has proven as the most efficient instruments to assist in creating economic opportunities for the small-scale business operators. Therefore, microfinance has evolved as the economic development technique and intended to assist low-income earners in operating their businesses smoothly. In other word, microfinance could be a crucial or effective component in poverty reduction.

Microfinance sector is the global movement serving over 80 million customers across the globe. The sector has a potential of becoming a significant component of successful and sustainably alleviating or reducing poverty (Bateman and Chang, 2012). Microfinance sector has played some pioneering function in organizing the underprivileged to obtain some credit. The sector plays an excellent function in guiding the underprivileged in taking suitable productive activities.

Microfinance Services

The microfinance offers a number of services; these include micro saving, microcredit as well as micro insurance. Micro savings entails deposit services that permit individuals across the globe in storing or saving certain amount of cash for their future use, without any minimum balance requirements. In this case, savings accounts permit small-scale business operators to save some amount of cash in attaining their unanticipated expenditures and be able to strategize for their future investment like old age and education. On the other hand, microcredit entails granting some small-term loans to individuals in need excluding those one in the banking system or the one that do not have any traditional guarantees (Stiglitz, 1993). It is usually an extension of some small loans in entrepreneurs to poor individuals. Micro insurance service on the other hand entails the system by which businesses, individuals and other firms make payments in sharing risk. Thus, access to such insurance enables small-scale business operators to concentrate on growing their entities while alleviating the other risk affecting health, property or capacity of work. To be more specific, micro insurance is the risk pooling service designed to be suitable for low-income operation in relation to terms, delivery, cost and coverage mechanisms.

Fundamental Role for government to the microfinance sector

Some of the fundamental considerations, which help in determining role of the government to the microfinance sector, include macroeconomic stability, phase or levels of growth in microfinance sector, geographical diversity, levels of growth of the banking system, population density as well as size of the potential microfinance marketplace (Katwaroo-Ragbir, 2013). Ensuring that there is macroeconomic stability in a country is usually the most significant responsibilities for different governments. This is because macroeconomic instability negatively affects the overall economic development in a country and limits any dynamic economic potential and opportunity for intensifying defensible admittance to the financial services. According to Morduch and Rutherford (2003) macroeconomic instability mainly increases volatility of the exchange rates, relative prices and interest rates and imposes some extra risks and costs on the financial institutions and their potential and current customers. High inflation results in some difficulties in harnessing full benefits of supportive nature and the government should therefore be accountable in controlling inflation (Meagher et al., 2006).

Growth as well as development of the microfinance sectors mainly relies on the levels of the banking system. In case the banking system said to be less developed, the government should mostly place their attention in development of rigorous banking system in order to offer some out-dated banking facilities before it established formal microfinance sector (Bateman and Chang, 2012). In essence, elementary banking system services are crucial for growth of a maintainable microfinance sector. Thus, absence of a sound banking system would results in several difficulties for microfinance sector in selecting a safe region to place their deposits as well as in managing loanable funds for the on-lending to different customers. Microfinance sectors would lose sureness on the security for their deposits in distressed and poor managed financial institutions where they would be forced to sustain some high transactions costs in extracting their deposits (Oni and Daniya, 2012). Furthermore, a less developed banking systems would make its more costly and difficult for the microfinance sectors in accessing the finances from the banking system whereas more developed one would be a good source of support (Labie, 2001). Therefore, the government has a paramount role in ensuring well-developed and efficient banking systems in order to facilitate proper development of the microfinance sector.

The government has numerous roles for developing microfinance sector (Wenner and Chalmers, 2001). Since all the responsibilities are not necessarily correspondingly operative and others might really harm the financial insertion by disheartening the private-sector service delivery, the government required to be well informed about the benefits and risks of particular intervention and modify their use to particular barriers which could hamper enduring financial services to underprivileged. For proper analysis and simplicity, the government roles are widely grouped into provider responsibility, promotional responsibility as well as protector responsibility (Demirgüç-Kunt, Levine & Detragiache, 2008).

The government should play some protective role in microfinance sector development. Regulatory and legal processes are the key tools for the government in demonstrating a protective role. By playing a protective role, the government would help in development of the microfinance sector in protecting savers, allowing the microfinance sector to mobilize all the external resources as well as offering the microfinance sector an official recognition from informal and unfair rivals (Zeller and Meyer, 2002). According to Morduch (1999), regulations strengthen the microfinance movement and thus there is not probability of impeding its development with some rigid rules and regulations. By playing a protective role, the government encourages innovation by providing flexibility for the institutional forms. Furthermore, some rules and regulations might be a little bit more flexible like recognizing the concepts of the solidarity groups as the approval and guarantee of the uncollateralized loans. The government has some limited ability in regulating the mushrooming microfinance sectors and there is therefore the need to account for some alternate or marginal form of the regulator or promoting some of self-directive (Rock, Otero and Saltzman, 1998).

Appropriate operational of protector responsibility by the government is significant since it builds confidence as well as addresses any form of imbalances that might exist between the financial institutions and the clients (Stiglitz, 1993). Therefore, the government have a crucial and critical objective of developing proper or applicable sensible guidelines or in embracing current banking guidelines in order to safeguard the creditworthiness of different institutes, which collect some credits from underprivileged individuals, in protecting their reserves as well as in building confidence on their customers (Crabb, 2008).  Nonetheless, the government regulatory ambitions should be balances with the readily available capacity in supervising, particularly when determining that different entities should experience sensible management.

On other occasions, the government should be involved in provider role where it acts as provider of the financial services to disadvantaged and poor groups (Adjei, Arun and Hossain, 2009). With the fact that performance of the governmental organizations differs, there are some scenarios where the government tends to involve itself as the direct supplier of the financial services, particularly endowed loans, as the most inefficient policy involvements for a viable access (Arun, 2005). This responsibility or task conglomerates both policy and financial ideas. Even though government microfinance institutions are anticipated to get by, they fails due to the policy objective issues. These institutions have a tendency of performing better on the outreach as compared to profitability (Robinson, 2001). They need massive or vast periodic recapitalizations, demanding widespread or broad communal backing, which could be used in serving other objectives like education or health and funding the private organizations in delivering pro-deprived finance. Such foundations with tougher outreach perform better as compared to the one that do not have (Massele, Fengju and Masele, n.d.). Therefore, having the government as the supplier of the financial services might generate some imbalanced rivalry by providing some endowed loans and could grind down payment culture in care collections. In this case, the government could play a more optimistic role in giving saving services or payment services as compared to subsidized credit (Zeller and Meyer, 2002).

The government could also opts serving in promotional role. Here, the government could play a role of promoter of the financial inclusion. Integration of the microfinance in the public sector could enhance expansion of the outreach amongst the rural population (Karim, 2011).  In developing microfinance sectors, the government task is to capitalize in set-up building where least banking arrangements could assist expansion of the countryside financial systems where the complementarity amongst the organizations intensifies sustainability and outreach (Moll, 2005). In adopting innovations, a model which incorporate the microfinance in the public sector could assist in supporting acceptance as communal goods (Lapenu, 2002). The government could also have a crucial task in executing innovation like microfinance services to the insurance or agriculture services. In addition, an equilibrium of the authority should be produced in between the government, and financial institutes via external regulation in evading political interruption whereas ensuring some active approval of sound financial and innovation doings (Charitonenko and Rahman, 2002).

The most important role the government could have to the microfinance is maintaining macroeconomic stability via appropriate and suitable fiscal and monetary policies. For instance, in the early 1990s, inflation volatility in Lao PDR was reported to hit three digits which in turn resulted to frequent price changes disruption microfinance sectors and confused its customers. Further, the government could be involved in private sector in the formulation of poverty lessening or elucidation approaches and openly or clearly recognizes its function or tasks in the financial sector enlargement. This active contribution by the government could assist in embedding the microfinance sector firmly in the financial system, with the non-governmental and private actors taking lead.  The government has a role in microfinance sector development in adjusting the regulatory frameworks allowing all financial institutions offering services to the underprivileged individuals. This is because restrictive or premature regulation could stifle innovation in the microfinance sector. For instance, Loi PARMEC located in the West Africa favoured supportive mode, to impairment of the others. This in turn limited poor individual’s choice as well as access to the services.

Further, the government needs to invest in the supervisory capacity in order to enhance expansion or growth of microfinance sectors. For instance, in several developed nations, the bank regulation ability is mostly restricted and there are no points in certifying an organization, which could not be supervised. Thus, the government has some complicated roles when it comes to the microfinance sector. With these considerations, this report present a detailed discussion on government’s tasks in microfinance sector in enhancing admittance to the financial services in a good number of the under-served and un-served low-income and underprivileged families (Karides, 2010). This is aimed at emphasizing on enhancement of access to the financial services as well as enhancement of maintainable financial services to the unreached.  

Further, when microfinance sector take voluntary deposit services, the government requires regulating the microfinance in protecting the depositors. The government also play a meaningful role in microfinance sector by supporting infrastructure. This is achieved by maintaining or ensuring there is a healthy financial system in place giving the necessary information to consumers through financial literacy training or providing information to different institutions such as the payment system or credit bureau. The government has a task or responsibility of developing microfinance sector by facilitating access to capital by permitting international and nation investment in the microfinance sector through equity or debt. The government also play a crucial function in developing microfinance sectors across the globe through provision of the complementary social services such as agricultural extension services, education, public infrastructure or health. The government also play a crucial role in microfinance sector development by encouraging investment and diversity investment or by promoting pro-poor services. In addition, the government play some special function in developing microfinance sectors through development ofs regulations that promote growth of the sector as well as monitoring and supervising the microfinance sector.  

Conclusion:

In conclusion, the government play some complicated role in the microfinance. To be more specific, the government has recognized that they should not do any good job by lending the poor, yet they are still seeking to promote these lending or credit by setting apex facilities making wholesale funding or financing available to several microfinance providers. These apexes could be useful or significant in case the country has some crucial mass of the solid microfinance institutions. Nonetheless, they have not been relatively efficient in developing some good entities where very few or none of the firm existed before and are more likely to be projected to some political pressures unless the structure efficiently precludes the government influences. Furthermore, though the government is not regularly good at offering financial assistance to small-scale business operators, they play a crucial role in setting up or putting in place appropriate policies that could help in controlling financial systems. Thus, the main role the government could do for the microfinance sector is maintaining macroeconomic stability in the country as well as avoiding interest rate caps, which prevent microfinance sector from covering their operating costs and enabling them, operate sustainably. Beyond, it is more doubtful that development of the microfinance needs national policy frameworks. Further, when microfinance sector take voluntary deposit services, the government requires regulating the microfinance in protecting the depositors.

Further, to enhance development or growth in microfinance sectors, the government play a meaningful role by supporting infrastructure. This is achieved by maintaining or ensuring there is a healthy financial system in place giving the necessary information to consumers through financial literacy training or providing information to different institutions such as the payment system or credit bureau.

The government should also facilitate access to capital by permitting international and nation investment in the microfinance sector through equity or debt. This would also assist in microfinance sector growth and development. The government also play a crucial role in microfinance sectors development through provision of the complementary social services such as agricultural extension services, education, public infrastructure or health. The government also play a crucial role in microfinance sector development by encouraging investment and diversity investment or by promoting pro-poor services. It also involves the private sectors in setting up some strategies by leveraging their support. Further, the government play a crucial role in microfinance sector by promoting equity in the service provision. This ensures vulnerable groups get access to the services via incentives, accessing to the capital as well as warding of the licenses. It also plays a crucial role in the microfinance sector development by offering protection to it citizens. This is achieved by protecting their savings, for instance the regulation, deposit insurance and supervision as well as controlling the predatory behaviour.

In addition, the government helps in growth of microfinance sector through development of regulations that promote growth of the sector as well as monitoring and supervising the microfinance sector.  The government intervention in microfinance took place in different means, which end up minimizing or eliminating incentives for the private sector involvement. Some nations might impose the caps on the interest rates; others might put in place banking rules and regulations, which stifle the sector while others might have some strong tradition of the state-run banking. Thus, there is a broad range of roles that the government could do in supporting the microfinance sector, from enhancing macroeconomic stability as well as legislative clarity to promotion of specific actions or events. At times, the government promotes training to the microfinance institution’s employees, supporting access to the cost cutting or reduction technologies as well as setting rules on a flexible banking hour.

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