The poor and poverty reduction has become the object of
unparalleled concentration now days both at national and international levels (
www.countercurrents.org).
As one of the MDGs, elimination of poverty has become a key issue for all those
interested in development of the developing countries (Nalunkuuma, 2006), with
microfinance as one of the predominant methodologies for making finance
accessible to the poor especially among the donor community. Many donor
agencies and governments in developingcountries are now funding a growing
number of microfinance organizations (Lont and Hospes 2004).
Microfinance is considered to be a solution for overcoming
poverty. Lack of savings and capital make it difficult for many poor people who
want jobs in the farm and non-farm sectors to become self employed and to
undertake productive employment-generating activities. Providing credit seems
to be away to generate self employment opportunities for the poor. But because
the poor lack physical collateral, they have almost no access to institutional
credit.
At the same time, informal lenders in many developing
countries often charge high interest rates, inhibiting poor households from
investing in productive income-increasing activities (Khandker, 1998).
According to Guerin and Palier (2005), the primary objective
of microfinance is the provision of financial aid on a small scale to those who
are on the fringes of society, too overwhelmed by the formal restrictions and
procedures of the organized sector, too vulnerable to help them and left out of
the mainstream. Microfinance provided to the vulnerable has to be synonymous
with empowerment of the beneficiary groups in order to sustain their income
flow and make them economically independent (ibid)
Microfinance institutions are therefore intended to provide
reliable and affordable financial services to the poor by providing cheap
credit with minimum requirements for example they demand for securities which
are affordable by the poor clients. These schemes also cut on the
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bureaucratic tendencies which make it easier for the poor
people to access micro credit. It is argued these microfinance institutions
(MFIs) are in position to enhance the ability of the poor to move out of
poverty as well as to prevent those above the poverty line from sliding into
poverty (Qorini Iwan, 2005).
Montgomery and Weiss point out that the case for microfinance
as a mechanism for poverty reduction is simple. If access to credit is
improved, it is argued, the poor can finance productive activities that will
allow income growth, provided there are no other binding constraints
(Montgomery and Weiss, 2005).This is a route out of poverty for the
non-destitute chronic poor. For the transitory poor who are vulnerable to
fluctuations in income that bring them close to or below the poverty line,
microfinance provides the possibility of credit at times of need and in some
schemes the opportunity of regular savings by a household itself that can be
drawn on. The avoidance of sharp declines in family expenditures by drawing on
such credit or savings allows `consumption smoothing' (ibid).
However, there are inconclusive arguments on the impact and
the role of microfinance and micro credit programs in poverty reduction.
Proponents of microfinance consider that poor's access to credit boosts income
levels, increases employment at the household level and thereby alleviates
poverty.
Also that, credit enables poor people to overcome their
liquidity constraints and undertake some investments. Furthermore that credit
helps poor people to smooth out their consumption patterns during the lean
periods of the year(Okurut et al 2004).By so doing, credit maintains the
productive capacity of the poor households (ibid).
Zeller and Sharma (1998) cited by Okurut et al (2004) argued
that microfinance can help to establish or expand family enterprises,
potentially making the difference between grinding poverty and economically
secure life.
But Burger (1989) observed that microfinance tends to
stabilize rather than increase income, and tends to preserve rather than create
jobs. In the same view, Arbuckle et al (2001) cited by Nalunkuuma (2006)
indicates that studies carried found little to recommend that micro credit has
any significant impact on enterprise incomes. Evidence by Coleman (1999)
suggested that the village bank credit did not have any significant impact on
physical asset accumulation; production and expenditure on education. The women
ended up in a vicious cycle of debt as they used the money from the village
bank for consumption and were forced to borrow from money
29
lenders at high interest rates to repay the village bank loans
so as to qualify for more loans. However, impact for women who had access to
bigger cheaper loans from the village bank was significant. The main conclusion
of the study was that credit is not an effective tool for helping the poor to
enhance their economic condition and that the poor are poor because of other
factors (like lack of access to markets, price shocks, un equitable land
distribution) but not lack of credit. A study of 13 MFIs in seven developing
countries concluded that households' income tended to increase at a decreasing
rate, as the debtors income and asset position improved (Mosley and Hulme 1998)
cited by Okurutet al (2004).Similarly, Hulme and Mosley (1996) cited by Lont
and Hospes(2004) in a study made on Twelve lending institutions providing
micro-lending services in seven countries found that the impacts of microcredit
on the poor were on average small or negative relative to the control group.
Results by Diane and Zeller (2001) in the study done in Malawi also suggested
that microfinance did not have significant effect on household income. Fisher
and Sriram (2002) stress that access to microfinance services protects the poor
against the often severe consequences of fluctuating incomes, ill health, death
and other emergency expenditures. Despite the overwhelming claims that
microfinance credit works best for the poor people, Johnson and Rogaly (1997)
argue that poorest borrowers become worse off as a result of credit and that it
makes them vulnerable and expose them to high risks.
Using gender empowerment as an impact indicator, some studies
argue that microcredit has a negative impact on women empowerment (Goetz and
Gupta, 1994). Goetz and Gupta (1994) as cited by Kabeer (2000) using a five
point index of `managerial control» over loans as their indicator of
empowerment. At one end of their index are women who are described as having
`no control' over their loans: these are women who either had no knowledge of
how their loans were used or else had not provided any labor into the
activities funded by the loan. At the other end are those who were considered
to have exercised `full' control, having participated in all stages of the
activity funded by the loan including the marketing of the produce. The study
found that the majority of women, particularly married women exercised little
or no control over their loans by this criterion. Sebstad and Chen (1996) as
cited by Lont and Hospes (2004) in their summaries of the thirty-two research
and evaluation reports found that micro lending to women had positive impacts
on their empowerment in Asian countries. However, reports from African programs
found very little or no impacts of microcredit on the empowerment of women. In
the same studies, credit had a positive impact on households' income, but the
impacts on health, on
30
the nutrition level of family members, and on children's
attendance at schools were not conclusive.
Also the view that it is the less badly-off poor who benefit
principally from microfinance has become highly influential and for example was
repeated in the World Development Report on poverty (World Bank, 2000) cited by
Montgomery and Weiss ( 2005). Simanowitz and Alice (2002) put it clearly that,
the microfinance industry has concentrated not on reaching the poor but rather
on financial and situational performance. Meanwhile Mayoux (2001) argues that
microfinance institutions are undergoing a period of rapid innovations. They
are coming up with products and new methodologies for reaching the broader
category of poor people including the poorest of the poor. This will enable
microfinance to have a significant impact in achieving poverty reduction.
Also where group lending is used, the very poor are said to be
excluded by other members of the group, because they are seen as bad credit
risk, jeopardizing the position of the group as a whole. Similarly, it's argued
that when professional staff operates as loan officers, they may exclude the
very poor from borrowing, again on the grounds of the repayment risk
(Montgomery and Weiss, 2005). Simanowitz in regard to groups points out that
while the use of the groups has the potential to build social capital, develop
skills; the way they are used varies considerably between MFIs. Some use them
solely as means for creating peer group pressure while others use them more
deliberately as vehicles of the empowerment (Simanowitz, 2003). From the above
discussions, we realize that core issues remain how to make microfinance
accessible to the poor and ensure that the benefits are positive. For the
purpose of this study, the above theoretical debates form the bedrock to
explore into the role of microfinance in poverty reduction in Rwanda.
