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International Journal of Management (IJM)
Volume 9, Issue 4, July–August 2018, pp. 1–9, Article ID: IJM_09_04_001
Available online at
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ISSN Print: 0976-6502 and ISSN Online: 0976-6510
© IAEME Publication
THE RELATIONSHIP BETWEEN
MICROFINANCE AND ECONOMIC
DEVELOPMENT IN DEVELOPING NATIONS
Apurva Kumar, Piyush Seth and Harsh Sethi
BBA Student-Jain University-Center for Management Studies, Bangalore, India
Prof Abhishek Venkteshwar
Assistant Professor -Jain University-Center for Management Studies, Bangalore, India
ABSTRACT
Purpose
Research in the field of Economy of developing nations have become a dynamic
study area over the past few decades and is likely to become even more so as the
importance of economic development is rapidly gaining momentum. Therefore
understanding the economy of developing nations will be viewed as increasingly
important. Microcredit is a great way of providing financial aid to the people who do
not have any means to take loans from a traditional bank, and that may have a
positive impact on the economic growth. However on the other hand it is just a
medium to exploit the poor by charging high interest rates and costs for providing
various other services, thus making them poorer.
This article aims at examining the Relationship between Microfinance and
Economic Development in Developing Nations
Key words: Microfinance, microcredit, financial, bank, loan, economic. developing
nations.
Cite this Article: Apurva Kumar, Piyush Seth, Harsh Sethi and Prof Abhishek
Venkteshwar, The Relationship between Microfinance and Economic Development in
Developing Nations. International Journal of Management, 9 (4), 2018, pp. 1–9.
http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=9&IType=4
1. INTRODUCTION
Microfinance is a type of banking service that gives micro loans, savings and insurance to
unemployed or low-income individuals or groups who otherwise have no access to the
common banks or investors. Traditional banks do not give loans to the poor people because
they are not sufficed enough to even give a collateral to the bank for the money they want.
These are the people who seek for micro financing services in order to fund their idea and
grow out of poverty. Microfinance aims to provide micro loans to poor people to work things
out and invest in their businesses and ideas. In short it gives them an opportunity to grow. As
Apurva Kumar, Piyush Seth, Harsh Sethi and Prof Abhishek Venkteshwar
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the Nobel Laureate, Mohammad Yunus says, “It is not that they are not talented, it is just a
sheer lack of opportunity”.
According to Diana Nicholson, Microfinance is a form of financial services that lends
money to extremely low-income individuals, who typical do not have access to typical bank
lending options. The loan (microloan / microcredit) is generally used to start or expand a
small business. The recipients microloans are often fairly new entrepeneurs that have a 1-3
person business. Typically microfinance loans are $100 or less. This dollar amount varies by
the geographic location of the recipient and the investment project. I have seen loans that
range up to $1,000 or $2,000. This can be for two reasons.
The investment is for a more established business
This is a pooled investment with more than 1 loan recipient. Often, microfinance projects
will focus on a specific type of investor. For example one project could be investing in small
farmers in a specific region. Therefore each individual farmer would receive a small loan, but
the project would aim to help many farmers.
Figure 1
Source:Diana Nicholson (2010)
The Relationship between Microfinance and Economic Development in Developing Nations
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Table 1 Change in microfinance indicators across the regions from 2002 to 2013
Source: Yousuf Sultan and Mansur Masih(2016)
2. ECONOMIC DEVELOPMENT
According to Aaron Hill, economic development is usually the focus of federal, state, and
local governments to improve our standard of living through the creation of jobs, the support
of innovation and new ideas, the creation of higher wealth, and the creation of an overall
better quality of life. Economic development is often defined by others based on what it is
trying to accomplish. Many times these objectives include building or improving
infrastructure such as roads, bridges, etc.; improving our education system through new
schools; enhancing our public safety through fire and police service; or incentivizing new
businesses to open a location in a community.
Economic development often is categorized into the following three major areas:
Governments working on big economic objectives such as creating jobs or growing an
economy. These initiatives can be accomplished through written laws, industries' regulations,
and tax incentives or collections.
Programs that provide infrastructure and services such as bigger highways, community
parks, new school programs and facilities, public libraries or swimming pools, new hospitals,
and crime prevention initiatives.
Job creation and business retention through workforce development programs to help
people get the needed skills and education they need. This also includes small business
development programs that are geared to help entrepreneurs get financing or network with
other small businesses.
3. DEVELOPING NATIONS
According to WTO Developing countries comprise a majority of the WTO membership. They
are grouped as “developing countries” and “least developed countries There are no WTO
definitions of “developed” and “developing” countries. Members announce for themselves
whether they are “developed” or “developing” countries. However, other members can
Apurva Kumar, Piyush Seth, Harsh Sethi and Prof Abhishek Venkteshwar
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challenge the decision of a member to make use of provisions available to developing
countries.
Figure 2
World map showing advanced, transitioning, less and least developed countries. The CIA gives the
following definitions:
Advanced Economies: A term used by the International Monetary Fund (IMF) for the top
group in its hierarchy. Similar to the term "Developed countries" but adds Hong Kong, South
Korea, Singapore and Taiwan, but drops Malta, Mexico, South Africa, and Turkey.
In transition: A term used by the International Monetary Fund (IMF) for the middle group in
its hierarchy. This group is identical to the group traditionally referred to as the "former
USSR/Eastern Europe". The group includes the countries which are close to reaching
"advanced economy" status, such as Moldova, Albania, Montenegro, FYR Macedonia,
Serbia, Bosnia and Herzegovina, Armenia, Georgia, Azerbaijan, Turkmenistan, Uzbekistan,
Kazakhstan, Kyrgyzstan, Tajikistan, Belarus, Ukraine, and China
Less developed: The bottom group in the hierarchy. Mainly countries and dependent areas
with low levels of output, living standards, and technology; per capita GDPs are generally
below $5,000 and often less than $1,500; however, the group also includes a number of
countries with high per capita incomes, areas of advanced technology, and rapid rates of
growth; includes the advanced developing countries, developing countries, low-income
countries, middle-income countries, newly industrialized economies (NIEs), the South, Third
World, and underdeveloped countries. Includes OECD and G-20 Industrial Nations members
like Brazil, Mexico and Turkey, because the Russian editor who prepared this map
misinterpreted the definition made by the IMF.
Least developed: Subgroup of the less developed countries (LDCs) initially identified by the
UN General Assembly in 1971 as having no significant economic growth, per capita GDPs
normally less than $1,000, and low literacy rates; also known as the undeveloped
countries.(CIA World fact book 2008)
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4. LITERATURE REVIEW
Kapilananda Mondal (2014): the founder & CEO VSSU, in his article „Community
Development through Innovative Microfinance‟ published in Microfinance Barometer 2014:
he has pointed out that the microfinance sector in India has recently witnessed the
catastrophic impact of excessive focus on numerical achievements. Development does not
follow any scientific formulae of progress; it needs to be client focused, process-oriented, and
have a holistic approach with sustainable impact as its goal.
Jayati Ghosh (2013) : is a Delhi based Feminist Economist & an observer of Microfinance,
listed the review of the recent literature on microfinance in developing countries and a critical
assessment of its effectiveness in her article “Microfinance and the challenge of financial
inclusion for development”. In the article, the author examines the experience of India, which
has one of the largest microfinance sectors in the world, and particularly the unfolding of the
microfinance crisis in Andhra Pradesh. It concludes that microfinance cannot be seen as a
silver bullet for development and that profit-oriented microfinance institutions are
problematic. To satisfy even some of its progressive goals, it must be regulated and
subsidised, and other strategies forviable financial inclusion of the poor and of small
producers must be more actively pursued.
NABARD (2013) : it has initiated new microfinance delivery model i.e., SBLP which become
popular in the whole world . Microfinance in India, as elsewhere, originally began as part of a
developmental and poverty-reduction project, led by NGOs who thought this would be an
effective way of allowing the poor to lift themselves out of poverty by their own efforts.
Many NGOs began the process of group lending based on self-help groups (SHGs) and the
linkage with commercial banks (whereby banks were allowed to lend to groups with a proven
track record of repayment) further enlarged its scope. SHGs and their federations became the
intermediaries between individual clients (who were mostly women) and the commercial
banking system through the SHG–Bank Linkage Programme (SBLP).National Bank for
Agriculture and Rural Development estimates that currently around 97 million households
have access to regular savings through 7.46 million linked to different banks. About 4.78
million SHGs also have access to direct 16 credit facilities from banks; around 82% of these
are women-only SHGs. The focus on women borrowers has been a major feature of
microcredit provision in India as in Bangladesh and is frequently cited as one of the ongoing
public strategies for women‟s economic empowerment
Microfinance Summit Campaign Report (2012) : the report provides information about the
out reach of microfinance world wide. It states that out of 3,652 microfinance institutions,
1009 are found in operation in Sub-Saharan Africa, 1746 in Asia and the Pacific, and 647 in
Latin America and the Caribbean. Microfinance as a financial intervention is popular in
developing countries of the world. In those continents Asia and the Pacific, have majority of
client outreach of some 82
Arunachalam (2011) : has pointed out a number of causes for the Andhra Pradesh crisis,
which are closely related to the very functioning of the sector in both for-profit and not-for-
profit variants. In particular, the explosion of multiple lending and borrowing was a prime
cause, and this was positively encouraged by MFI lenders. Poor households took on multiple
loans from different sources, often only for the purpose of repaying one of the lenders, and
this was fed by the combination of aggressive expansion in the number of clients and strict
enforcement of payments. Further, despite the claims about personal involvement and group
solidarity being the basis of the lending process, Arunachalam notes the widespread use of
agents. There are two main types of microfinance agents: local grassroots politicians, who use
the loans to add to their political clout; and the heads of federations of borrower groups (or
SHGs), who make an additional profit by controlling or appropriating the flow of loans.