Financial to people who are living in poverty Essay

1. IntroductionMicrofinance is the provision of pecuniary to concourse who be living in s back toothtiness. The formation is providing micro loans to pathetic mortal who want to expand their business line. A series of monetary religious service include loaning, saving, insurance and so on. There be twain primary(prenominal) characteristic on microfinance. Firstly, it is focus on on be blue average income person or poor person for their customers. Secondly, it must ensure that the possibility of its make sustainable organic evolution. The beginning of the activity was most closely associated with economist Muhammad Yunus in 1976. He was born in Bangladesh. Between 30 years, the success of Grameen cambering partnership which was built by Yunus was noticed by the world. Then, microfinance has covered nearly development countries and some developed counties. In the case of the text book, microfinance was present by two extreme split, macro success and world(prenom inal) mess. For the macro success, lender loaned money to women in order to support their family. Then, very practically family got relinquish of poverty. By 2001, more than 7,000 microfinance institutions had served 120 cardinal borrowers around the world. On the opposite hand, there argon two debates lead to huge capers. Firstly, most of microfinance institutions new sh beholders were rich investors. Secondly, several competitive microfinance institutions loaned money to the same noncivilised clients, if crop or ventures fail, clients would face crushing debt loads. For example, in some parts of India, almost 80% of borrowers were in default.2. Case question 1Therefore, what pass off or so microfinance? Does it macro success or global mess?2.1 rise analysisFor the critical thinking of microfinance is SWOT analysis. SWOT analysis may jock us know more nigh microfinance totally. There argon two strengths for microfinance, the first one is that helped in decrease the poverty. The target of microfinance is to put forward loans to poor batch who want to seize on small business only stacknot able to ingest moneymaking(prenominal) intrust help. For example, more than 350 million mess in Indian below average income. The microfinance institutions offer the opportunity to them to start their ownbusiness. So, microfinance helps in decrease the poverty. The second one is that promoting the development of topical anesthetic community. If every psyche who receive small loans to become rich, the development of local anaesthetic community result be promoted. There be two weaknesses ab push through the microfinance. First of all, it is not proper regulated on banking process. Due to lack of gritty-octane rules and regulations there would lead to high case of ac reliance run a risk and defaults. Moreover, microfinance institutions focus on less flock only. For example, Indias 70% of people live in the village, that is to say that most of p oor knowledge base seaportt been touched. For the opportunity of microfinance, there atomic number 18 two main points likewise. initially, it tranquil has huge untapped market. For example, Pakistans microfinance industry was developing faster already, with an enlargement of nearly 47 percent during 2007 (AbanHaq, 2008). By the end of 2008, the borrowers had been extended to 1.7 million (Meher Shah, 2009). In addition, some small business which were loan from Microfinance institutions would provide much more employment opportunities. Microfinance institutions not only loan money to individual to start their business besides also help in the append the employment opportunity to them. There two threat analysis about microfinance as well. The first one is that over involvement of government. For example, in Indian, bank had freeze on credit to micro lenders for many times, it led to Indians microfinance industry pushed to the brink of collapse (Indias microfinance sector below threat, 2010). Furthermore, it is a high opposition industry. For example, Indians commercial bank normally provides about US$ 133 a week in credit to the microfinance industry (Indias microfinance sector under threat, 2010). So, it is cause to high contestation for much more applicant.2.2 Why has microfinance been quite successful on intercontinental basis? In the study case, 84% of microloan recipients are women(DEspallier, Gurin, & Mersland, 2011). Therefore, it is good find that most of microfinance institutions target to women. This is because that repayment is higher among female borrowers, they ordinarily do more conservative investment and reduce moral gamble risk(DEspallier, Gurin, & Mersland, 2011). On the other hand, when women improve their circumstances, they also improve the lives of their children. So, by investing in nutrition and education, they can help to create a better future for their children and their communities.Furthermore, many microfinance instituti ons help much poorest families get rid of poverty. It is to ensure that 175 million of the worlds poorest families, especially women, receive credit for self-employment and other financial and business services(DEspallier, Gurin, & Mersland, 2011). indeed, it absorbs global attention. In addition, the success of the Grameen Bank of Bangladesh indicated that a new business molding had been created. Until recently, Grameen has reported repayment rates of 98% and serving over much more function to poor person (Morduch, 1999). This new business models was imitated by the world.3. Case Question 2Using agency theory, identify the area or improvement for the government of certain MFI pay off be imbed to engage in questionable practice. Microfinance institution is a party that dowry poverty to do business by offering mini-loan. It is an agency of not only providing finance service to support poverty but also an organization contributes to society. The main problem of lending money to p ool people is high risks of returning the money. The pool people, who are lack of educations, experience and withdraw more train to return to the job. As an agency the principal (top managers) contract profit while loan office is less concern about the interest.3.1 Agency theoryAgency theory explains the relationship amongst principals and agents. The documentary about this theory is to identify and calve the problem and conflict between principal and the agent of the principal. The two problems agency theory addresses are * riddle of desire goal of principal and agent are in conflict. * caper of different acts in managing the risk.This theory had been used in examining the relationship of agency, determine as a contract under which one or more persons (the principal) engage another person (the agent) to perform some on their behalf which involves depute some decision making authority to the agent (Jensen & Meckling, 1976) The following equivalence shows the result of prob lem come from. The utility of the principal impart focus on return, whereas the utility of the agent will focus on the income. ingredient wants to increase the income while the principalrefers to more return. As the result, there is a trade-off exist in between. UP (R) = 1/UA (I)UP = public-service corporation of the principalUA= Utility of the agentR = ReturnsI= IncomeIn consequent, to resolve the problem is to founding the ideal contract. There are two types of contracts visualise for such problem behavior-based contracts and outcome-based contracts. Behavior-based contract, the principal monitor, measure and reward the base on the agents behavior (Bergenetal, 1992). The outcome-based contract, the agent will be rewarded check to the realized outcome (Bergenetal, 1992).3.2 Porters Five ForcesPorters five forces is concept for analyzing industry and developing schema of a company to position business. Base on this concept to understand microfinance industry environment. Inve stors evermore seek for return the industry environment will impact how efficient the decision made for profit.Source(Porter, 1979)Suppliers (High)There are many investors in market those can divide into two types, commercial investor and combine investor. The faith investors are not seeks for profit, but long term poverty alleviation. (Cranenburgh, 2010)commercial investors are looking for return because the capital market is cheaper. Unfortunately there are most MFI remain lending money to pool people are in clod which the stakeholder are commercial investor. Threat of new entrants (High)Commercial investors are better in positioning that they have better access than financial service expertise. Low entrant capital require lead to low entrant standard require. The investors seeks return, it cause high impactin investment. Commercial investors look for short term invest, and it can be re-enter for commercial investment as a cycle. Threat of substitute (Medium)Poor people need mon ey of making living and other social take aim (education, insurance, sternness.eg) for life long. In India, the Reserve Bank of India (RBI) provides life insurance for poverty to improve the life expenses under the microfinance category. In many other countries, MFI design new financial service according to the need of poverty which laden very low interest. Internal rivalryIn fact, the intensity of competition is depends upon the size of the company in the game. As entrant barrier low, the study operators in industry are informal institution (SHGs, MFI and NGOs). The competition will increase when an established organization goes into market and implement promotional strategy for boosting out of bad situation as it is weak. In additional, some formal bank start to do financial support with the help of other commercial organization like provide loan for SHGs. This factor will attract more operators in market.3.3 Challenge Facing by MicrofinanceThe microfinance system is separated in three aims micro, meso and macro. To understand the function of those levels activity, identify the scrap MFIs are facing by governance.Source Adapted from Helms, Access for eachThe micro level activity includes both perspectives of clients and MFI. The problem comes out from the borrowers perspective is limitation of financial support. This would cause predatory lending practices. From the clients perspective, the problem relate to the managerial experience of clients, how they manage the funds and sustainable funds. The meso level is about services and infrastructures. The MFI need strong backup to support on-going financing lending process. Limited capacity would terminate the funds to borrower. The macro level consists of central bank, finance ministries and other financial department. The problem comes out the potential risk whennew policy established (monetary and currency, egg). The failure of systemic function would lead to a collapse of MIFs. 4. Case Question 3ON ET HICS Given the criticisms that the rich have literally profited from the shit poor. Do you have any reservations about investing in MFIs that have gone through IPOs? Microfinance is a key thing that can help people living in poverty to become financially independent. It is better able to provide for their families in times of economic difficulty. Considering nearly half of world in less than two dollars a twenty-four hours to survive, microfinance is an important solution. However, microfinance has its shortcomings. Thus, in our opinion about this question, we are neutral. Here are advantages and disadvantages in below.4.1 AdvantagesAccess Banks will not extend loans to those with little or no assets, and generally so not engage in small size of loans associated with micro-financing companies. Microfinance is based on the concept that even small amounts of credit can help end the vicious cycle of poverty. Extending educationFamilies receiving microfinance are less likely to pull t heir children to leave instill for economic reasons. correct health and welfareMicrofinance can lead to better access to jazzy drinking water and better sanitation, and providing better access to health precaution as well. SustainabilityIn the developing country, even a small works capital loans $100. It can be launch a small business. Benefactors can help pulling themselves and their families out of the poverty. For example, a 19-year-old girl named Salamatu, from Sierra Leone started interchange rice business (Kate, 2011). When her father and brother died, she could not pay the school fees by her own. She joined a local saving and Loans Group program in her community. This group can bring in small loans to them. Salamatu took out two loans. One is starting a small rice selling business and one is paying for her school fees (Kate, 2011). Job creation Microfinance can help create new jobs. It has a beneficial impact on the local economy. 4.2 Disadvantages most investors who a re interested in ad hoc microfinance IPO must be wary (wise GEEK, 2012). Because some microfinance institutions are free with funding to the poor, but require excessive interest payments in return. This can put a person into a wore financial hole. This would cause social unrest.MFIs in India increase the risks. MFIs might face increased pressure to provide the assets and income growth (Jennifer, 2010). Thus it would increase default risk. In addition, because of high yield investors interests, microfinance institutions issuing high risk loans. This could cause valuation issues. However, lenders often could not perform. Because India does not have national systems that track the borrowers credit history (Jennifer, 2010).5. ConclusionFirstly, we give the reason of microfinance has been successful. Secondly, we identify the areas for improvement of MFIs. Then, we provide the two parts advantages and disadvantages. Some considering buying into microfinance IPO should be carefully exam ined, and understand the company and its specific practices, then proceeding. Microfinance is not always appropriate. For extreme poor, or those who are sick or unable to work, microfinance may not be an appropriate tool. BibliographyIndias microfinance sector under threat. (2010, November). Australian Banking & Finance, p. 20. Cranenburgh, K. C. (2010). Analysis of the Microfinance Sector Faith Institutions and contact Investing. International Interfaith Investment Group, 37-38. DEspallier, B., Gurin, I., & Mersland, R. (2011, 5). Women and Repayment in Microfinance A Global Analysis. World Development, pp. 758-772. Haq, A. (2008). Microfinance Industry Assessment A stem on Pakistan. Islamabad Pakistan Pakistan Microfinance Network (PMN). Jongbloed, K. (2011). DIY Banks Make Education Possible For Girls. Retrieved from http//blog.becauseiamagirl.ca/diy-banks-make-education-possible-for-girls Meher Shah, A. N. (2009). attitude light on microfinance. Micro note. Islamab Pakistan M icrofinance Network (PMN). Morduch, J. (1999, October). The roleof subsidies in microfinance rise from the Grameen Bank. Journal of Development Economics, pp. 229-248. Shevock, J. (2010). Microloan Default Risk Rises in India as SKS Microfinance Plans Initial Public Offering (IPO). 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