Impact of Micro-Finance on Economic Development

Introduction
In both developing and emerging economies, microfinance has vastly and increasingly been seen as one of the most important means for enhancing the lives of the poor and therefore a major tool for economic and social development mostly in rural areas. Lately, contrary to this widespread belief, critics have raised eyebrows against this growing popularity of microfinance as a major tool for enhancing economic development. Contrary to belief, they are of the opinion that microfinance is a ‘make-belief’ that is hindering economic and social development rather than enhancing it.
It is to this regard and in light of these growing controversies therefore, that this essay intends to take a critical look at the context “microfinance” in order to make an informed judgement on this growing controversy.
Before ascertaining the impact of Microfinance on economic development, it is imperative to first take a cursory look on what Microfinance is all about, its characteristics and the way it differs from traditional banking and therefore take a critical look at the criticisms surrounding it, so as to come up with the right judgement concerning the role it plays towards economic and social development.
What is Microfinance?
Traditional banking system has widely been regarded as unfit for the illiterate poor with no guarantees, as such ad hoc products designed to fulfil the needs of potentially billions of peculiar and unconventional borrowers, might prove successful in enhancing wider financial access, with a positive objective of bridging inequalities and fostering economic development (Visconti, 2008). It is to this regard, that the World Bank in 1996 established a Consultative Group to Assist the Poor (CGAP), directing entirely about $200m in funding of microfinance projects (Rogaly, 1996).
The term micro-finance has over the years generated a lot of definitions by various authors. Armendáriz and Morduch (2010) have documented that despite several claims as to

References: Amsden, A. (2001) The Rise of ‘The Rest’: Challenges to the West from Late-Industrializing Economies. Oxford, Oxford University Press. Bateman, M. (2003) “New Wave” Micro-finance institutions in South-East Europe: Towards a more realistic assessment of impact’. Small Enterprise Development, Vol.14, Issue 3. Pp.56–65. Bateman, M. (2008) ‘Borderlands and microfinance: impacts of “local neoliberalism” in: Michael Pugh, Neil Cooper and Mandy Turner (eds.) Whose Peace? Critical Perspectives on the Political Economy of Peace building. London, Palgrave MacMillan. Bateman, M. and Chang, H. (2009) The Microfinance Illusion [Online]. Available at: http://www.econ.cam.ac.uk/faculty/chang/pubs/Microfinance.pdf [Assessed: 27 July 2010]. Bogan, V. (2008) Microfinance Institutions: Does Capital Structure Matter? [Online]. Available at: http://ssrn.com/abstract=1144762 [Assessed: 28 July 2010]. Chang, H. (2002) Kicking Away the Ladder – Development Strategy in Historical Perspective. London, Anthem Press. Chang, H. (2007) Bad Samaritans: Rich nations, poor policies and the threat to the developing world, London, Random House. Deutsche Bank, (2007) Microfinance: An Emerging Investment Opportunity. Working Paper. [Online]. Available at: www.dbresearch.com [Assessed: 27 July 2010]. Dichter, T. (2007) A Second Look at Microfinance: The Sequence of Growth and Credit in Economic History. Development Policy Briefing Paper No 1. Center for Global Liberty and Prosperity, CATO Institute. Elahi, K.Q. and Danopoulos, C.P. (2004) Microcredit and the Third World: Perspectives from Moral and Political Philosophy. International Journal of Social Economics, Vol.31, Issue 7. Pp.643-54. Ellerman, D. (2007) ‘Microfinance: Some conceptual and methodological problems’, in Thomas Dichter and Malcolm Harper (eds.), What’s wrong with Microfinance? London, Practical Action Publishers. Epstein, K. and Smith, G. (2007) Microlending: It’s no cure at all. Businessweek Online, 13th December. Available at: http://www.businessweek.com/magazine/content/07_52/b4064045922248.htm [Assessed: 31 July 2010]. Gonzalez-Vega, C. (1998) Microfinance: Broader achievements and new challenges. Economics and Sociology Occasional Paper, No. 2518. [Online]. Available at: http://www.microfinancegateway.org/gm/document-1.9.27077/1443_1443.pdf [Assessed: 31 July 2010]. Ledgerwood, J. (1999) Microfinance: An Institutional and Financial Perspective. Washington D.C., World Bank. Lont, H. and Hospes O. (2004) Livelihood and Microfinance. Delft, Eburon. Mcguire, P.B. and Conroy, J.D. (2000) The Microfinance Phenomenon. Asia-Pacific Review, Vol.7, Issue 1. Pp.90-108. [Online]. Available at: http://www.informaworld.com/smpp/content~db=all~content=a713650817~frm=titlelink [Assessed: 31 July 2010]. Mersland, R. and Strøm R. (2007b) Performance and corporate governance in microfinance institutions. [Online]. Available at: http://ssrn.com [Assessed: 28 July 2010]. Microcredit Summit (1997) Microcredit Summit, Declaration and Plan of Action. February 2-4. [Online]. Available at: www.microcreditsummit.org [Assessed: 28 July 2010]. Onyujargal, T. and Nyamaa, T. (2002) Sub-sector review of Micro-finance in Mongolia. UNDP. [Online]. Available at: http://www.uncdf.org/english/microfinance/uploads/technical/mongolia-sumreview.pdf [Accessed: 27 July 2010]. Otero, M. and Rhyne, E. (1994) The World of Microenterprise Finance. London, IT Publications. Robinson, M. (2001) The Microfinance Revolution: Sustainable Finance for the Poor. Washington D.C., World Bank. Roodman D. and Qureshi U. (2006) Microfinance as Business. Working Paper, No.101. [Online]. Available at: www.cgdev.org [Assessed: 26 July 2010]. Steel, W.F., Aryeetey, E., Hettige, H. and Nissanke, M. (1997) Informal Financial Markets Under Liberalization in four African Countries. World Development, Vol. 25, No.5. Pp.817-30. Visconti, R.M. (2008) A survey on microfinance for developing countries: A social responsible investment opportunity. [Online]. Available at: http://ssrn.com/abstract=1284472 [Assessed: 26 July 2010]. Wade, R. (1990) Governing the Market. Princeton, NJ, Princeton University Press. Yunus, M. and Jolis, A. (1999) Banker to the Poor: Micro-Lending and the Battle against World Poverty. New York, Public Affairs. [ 1 ]. See Armendáriz and Morduch (2010) “The Economics of Microfinance. See also Otero and Rhyne (1994). Robinson (2001) noted that the Grameen Bank was radically a new way of dealing with poverty and under-development (in Bangladesh). [ 3 ]. Definitions of micro-enterprises vary throughout the world, but they are usually based on the size of business (i.e. by number of employees, total assets or volume of sales) and its need for small amount of credits (Oyunjargal and Nyamaa, 2002). [ 5 ]. Some country examples are stokvels in South Africa, tontines and susu in West Africa, iqqubs in Ethiopia, ke in Korea, and arisan in Indonesia (Anderson, 2002). [ 9 ]. See Dichter (2007), Rogaly (1996), Bateman (2003, 2008).