Impact of Microfinance on Developing Countries Literature review

Impact of Microfinance on Developing Countries - Literature review Example With no access to financial systems, the poor have to define new informal ways through which they have to guarantee their financial survival while at the same time obtaining seed capital for development. Such informal community based institutions are meant to meet their daily and long-term financial needs, a gap that is perfectly filled by the micro financial institutions (Jegede, Kehinde & Hamed, 2011). Consequently, micro financial institutions are organizations developed towards promoting economic activities among the poor and low-income earners, where formal financial institutions have not offered similar services. To these people, banking services are impossible or almost impossible and they have to get a new way of bridging the gap left by the banks, which makes micro financial institutions prominent in poor countries particularly in the African continent. Micro financial institutions will lend small amounts of capital to members and other poor individuals in the locality towar ds poverty eradication, in addition to providing the poor communities the same services that are available in banks, and which are enjoyed by the rich (Jegede Kehinde & Hamed, 2011). In fact, microfinance institutions do not only provide capital for the poor but will go an extra mile to alleviate poverty from the basic individual level and at the community level (Anyanwu, 2004). Consequently, as Anyanu asserts, in Africa and other developing countries, microfinance institutions are considered the main source of funding for the poor towards creating projects that alleviate poverty and educate the poor on wealth creation. Due to the important role played by these institutions in poverty eradication, the government of Nigeria adopted micro financial institutions as the main route towards poverty eradication with the central Bank of Nigeria developing the necessary policies to facilitate operations of these institutions. This is despite the fact that the number of people benefiting from these institutions is still lower than required, with more people targeted through expansion of microfinancial institutions throughout the rural areas in the country. More than 70% of Nigerians live below the poverty line with microfinance banks serving about one million clients across the country that has a population of more than 140 million people (Irobi, 2008). Considering these facts, it is important to investigate how microfinance institutions affect the poor in developing countries with a close focus on Nigeria. Microfinance institutions have a role to correct an imperfect market in answering the various shortcomings of imperfections in the credit market (Armendariz & Murdoch, 2010). Making it easy for people to obtain capital has been shown as the best way to increase output, profits and net income among the poor, which improves their individual and communal welfare. However, the borrowing capacity is mostly dependent on the amount of information in the market, the vulnerab ility of the business being funded and the amounts of uncertainties in the business setup (Duvendack et al, 2011). Moreover, credit facilities continue to be used for gender empowerment among the poor where microfinance institutions targeting women have continued to sprout. Such credit facilities and education on members are aimed at promoting the status of women in the society and empowering them to handle more roles in the society and their families in general (Duvendack et al, 2011). There is a general simplified assumption that credit is an exogenous mode of treatment on borrowers that represent the wellbeing of the affected individuals through changing their livelihoods and other relations between individuals (Duvendack et al,