Literature review on microfinance in kenya

In general, formal financial services are not available to poor people because of the high interest rates, collateral requirements, complicated application procedures, and long admissions processing. The high interest rates caused by high transaction costs are ascribed to the lack of collateral and the small loan amounts desired. The biggest contribution of microfinance has been showing that lending to the poor is feasible and that keeping good repayment records is achievable when institutions are appropriately designed.

One of the successful models of microcredit is Grameen Bank, which provides loans to 7. Various types of MFIs are now operating around the world. These successful experiences of MFIs have prompted academic studies to identify the mechanisms for solving the problems associated with asymmetric information. Although many studies are being conducted, the practices of microfinance continue to evolve and are rapidly expanding in scope.

These successive events were the outcome of the good reputation for the performance of microfinance over several decades which led to a new phase in microfinance. Microfinance has attracted the attention of various circles who consider it a good business opportunity. As the industry has grown, the focus of microfinance has shifted from that of a social movement to the integration of microfinance into the formal financial sector Ledgerwood and White This integration has led some to argue that microfinance and formal financial business are irreconcilable; they condemn the practice of pursuing profit as deviating from the mission of microfinance regarded as mission drift.

There are arguments for and against microfinance institution IPOs and profit taking, 4 but what is important is the fact that dynamic changes in microfinance are continuously expanding its scope and transactions with various types of circles. By narrowly defining microfinance, one can limit its prospects in poverty reduction and in seeking out promising microfinance opportunities.

Impacts of Microfinance on Grassroot Development a Case Study Uf the Ketu North District

What is microfinance? Microfinance offers poor people access to basic financial services, such as loans, savings, money transfer services, and microinsurance. Among the various types of microcredit schemes, which vary according to location and MFI, Grameen Bank is regarded as the prototype of microcredit. There are several other elements that make microfinance work effectively, including progressive lending, repayment schedules with weekly installments, public repayment, and the targeting of women.

As a result, lending that does not involve groups has increased. Kono and Takahashi in this issue address the impacts, innovative mechanisms, and recent challenges of MFIs through a review of the existing published literature.


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Specifically, they describe the accumulated empirical evidence on microcredit, the recent theoretical developments on the mechanisms underlying the high repayment rates, and the problems and possible remedies associated with microinsurance operations. In the s and s when microfinance was mainly provided through the public sector, its usefulness was discredited as a result of the low repayment rates due to lax government management.

But microfinance schemes have succeeded in broadening financial outreach to the poor and have demonstrated that a high repayment rate is achievable. Furthermore, the pioneering Grameen credit schemes showed that microfinance consists of various elements, including poverty reduction, empowerment of the poor, increasing income, creation of business opportunities, investment, and family risk management. The emphasis of microfinance has been on poverty reduction and empowerment, i. However, decades of experience in microfinance have revealed that the problems of the high transaction costs associated with information asymmetry can be solved with appropriate institutional designs and improvement of the financial system.

Development practitioners are becoming all the more convinced of the importance of the financial system. Therefore, the importance of financial access, which entails not only obtaining credit but also making deposits and money transactions, and obtaining insurance, has become broadly recognized. In developing countries, especially in rural areas, the credit market is segmented.

Information problems in the rural credit market are severer than in urban and conventional markets; hence, it is easy for poor people in rural areas to face financial constraints. One of the important roles of finance is to allocate credit to optimize the intertemporal problems of output and consumption. Without a credit market, people have to cover their consumption and investment using their income in the current period.

The income of poor people, however, is too small and unstable to sufficiently cover both consumption and investment.

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Literature Review Microsavings: Publications: FSA

For instance, a sudden decrease in income because of illness of the head of a household means that family members have to find another income source. If this is impossible, they have to reduce their investment and consumption. Because poor people are generally quite vulnerable to unfavorable incidents and unexpected risks, reducing investment in education leaves the next generation poor, and the vicious circle of poverty never ends. Financially constrained people have to prepare for unexpected risks by themselves, meaning that risk management is much more important for poor people.

Therefore, risk management, encompassing loans, savings, and insurance, is a crucial role of microfinance.

FINANCIAL SERVICES TO THE POOR: AN INTRODUCTION TO THE SPECIAL ISSUE ON MICROFINANCE

It has been said that poor people are too poor to save money, and, hence, there is no demand for savings. However, saving is a core principle of risk management for households.

Microfinance in Kenya

Insurance is an effective measure for coping with risk, which has made microinsurance the focus of an important financial service. As with all insurance, risk pooling under microinsurance attempts to allow many individuals or groups to pool risks and redistribute the costs of risky events within the pool Churchill The features of microinsurance are: group pricing with links to other services, limited period and scope of coverage, limited screening on preexisting conditions, simple and easy to understand policy document, and smaller indemnity. Although the greatest demand is for health insurance, such insurance is likely to be more difficult to market than life and property insurance because: 1 a third party is necessarily involved e.

These difficulties of micro health insurance are examined by Ito and Kono in this issue using survey data from India.

Research Article

Microinsurance is at an early stage of development in India, where a uniform product is being offered to poor people. The authors endeavor to investigate the causes of these practical but basic problems based on recent insurance literature and behavioral economics literature, along with experimental survey data. Novel and advantageous features of this article are its application of behavioral economics to microfinance and its utilization of experimental survey data to discern household characteristics that affect the purchase of health insurance.

There have been two paradigm shifts in the microfinance field. The first paradigm shift began to emerge in the second half of the s. The second paradigm shift emerged in the middle of the s. This shift was from microfinance to inclusive finance, from supporting discrete MFIs and initiatives to building inclusive financial sectors United Nations The framework recognized that the massive number of excluded people would gain access only if financial services for the poor were integrated into all three levels of the financial system: micro, meso, and macro Helms The meso level includes the financial system's basic financial infrastructure and its range of services.

The macro level consists of an appropriate government legislative and policy framework. Traditional microfinance focused on the micro level of financial providers, but current microfinance focuses on a more comprehensive financial system. The microfinance agenda is now increasingly client or market driven.

Therefore, new attention is being given to client products: focusing on how to attract and keep clients Cohen Under increasingly competitive conditions, obtaining information on clients becomes crucial for MFIs: Who are the clients? How do the clients use the products?

What new product would better serve current clients? What new products would attract new clients and expand outreach? Dunn In this issue, Tsukada, Higashikata, and Takahashi use household panel data from Indonesia and apply the mixed logit model to analyze the changing credit demands of clients. Although the perspective of microfinance has widened, essential microfinance objectives remain unchanged. Outreach to the poor is one basic motive, and making a positive impact and maintaining financial sustainability remain important focuses.

Zeller and Meyer explain the inherent trilemma of microfinance: outreach, impact, and financial sustainability. They present an analytical framework of the critical triangle in achieving the economic sustainability of microfinance. In their framework, many types of institutional innovations contribute to the financial sustainability of MFI, impact of microfinance, and outreach to the poor and these institutional innovations interact with the outer circle represented by the external socioeconomic environments as well as the macroeconomic and sectoral policies.


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A harmonization at the institutional level and improvements in the policy environment improve the performance of financial institutions. The efforts to harmonize with the two levels are equivalent to building an inclusive financial system. Although microfinance continues to expand, many poor people still remain mired in poverty.

The fact that outreach to the poorest of the poor is not being achieved has provoked criticism that microfinance has drifted from the mission.

I. INTRODUCTION

As the microfinance industry has grown, financial sustainability has been increasingly emphasized. There have been a large number of microfinance success stories over the past few decades.

Such anecdotal episodes may have encouraged poor people to borrow money, leading to the rapid expansion of microfinance. This expansion has been assessed mostly based on the increase in the number of borrowers and MFIs, the increase in the total amount of loans, and the high repayment rates. Recently, more rigorous efforts to evaluate the impact of microfinance have been conducted in place of only evaluating quantitative expansion.

However, accurately assessing the impact of microfinance is not straightforward. To accurately gauge the effect of microcredit, it is necessary to compare a client's situation with a counterfactual situation where microfinance is not provided, which cannot be readily examined. Takahashi, Higashikata, and Tsukada in this issue address this impact issue using data collected in Indonesia. Although Indonesia has a long history of microfinance, as will be explained below, there are few rigorous evaluations of the impact of microfinance.

The authors seek to fill this gap in the literature by applying an advanced econometric method, i. The commercialization of MFIs is one solution for financial sustainability. One of the reasons that transformation or commercialization of MFIs is important is the increasing demand for savings. The focus on the importance of savings for poor people is a recent development.