Microfinance from LDCS to DCS: Are Socio-Economic Differences Important?

Microfinance from LDCS to DCS: Are Socio-Economic Differences Important?

Samanthala Hettihewa (University of Ballarat, Australia) and Christopher S. Wright (CRIC, University of Ballarat, Australia)
Copyright: © 2011 |Pages: 19
DOI: 10.4018/978-1-61520-993-4.ch016
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Abstract

Microfinance (MF) has demonstrated great success in poverty-relief in less-developed countries (LDCs) and is experiencing rapid growth and interest in developed countries (DCs). However, the current literature on DC MF leaves a general impression that DC MF is failing and its original core intent of poverty relief is being diluted by survival concerns. Descriptive analysis is used in this chapter to infer that DC MF must be redesigned to meet DC socio-economic conditions, if it is to avoid a reputation of being too poorly focused, ineffective, and inefficient for use in DCs. After demonstrating that poverty in LDCs is harsher than in DCs, this chapter reviews current-performance concerns of DC MF, discusses how it can still effectively relieve poverty in DCs, examines how regulatory and other socio-economic factors affect micro-enterprise, and concludes that MF should be refocused before DCs commit to further developing/adapting MF infrastructure.
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Introduction

Microfinance (MF) has a long history of successful deployment in lesser developed countries (LDCs). However, MF has different meanings for different people and interest groups, that vary from micro-credit (for micro-enterprise development and consumer durables) to insurance and income protection, to social enlightenment (Burkett, 2003). This chapter corrals this diversity of meaning into a broad definition where MF is conceptualized as a set of tools, approaches and strategies developed in LDCs to give a hand-up to people who are trapped in poverty because, for various reasons, they are excluded from accessing mainstream financial services. Buckland & Dong (2008) note that financially excluded people (by definition) rely almost entirely on non-mainstream and informal financial services. The well-documented profound success of MF, in helping many poor in LDCs escape the poverty trap, has sparked debate on how such powerful tools can be, or have been, imported to developed countries (DCs) for similar service—for details see Servon, 1997 and 2006; Bhatt & Tang, 2001; Hung, 2003; and Dubreuil & Mirada, 2008.

The literature on DC MF projects, as noted later in this chapter, gives the general impression that MF in DCs is failing to achieve both its financial and poverty-relief objectives. Many researchers attribute these difficulties to high administration costs, nonperforming and/or defaulted loans, adverse-selection of clients, cost-recovery issues, difficulty developing appropriate administrative tools (e.g. use of peer-groups), and confusion over its client base and role in society. However, the thesis in this chapter is that these issues are symptoms and that, unless the fundamental cause of these symptoms is resolved, the progression of DC MF setbacks will continue and likely turn to a general rejection of DC MF by fund providers and mainstream DC finance.

This chapter flows from the premise that a tool designed for a specific purpose and for use under specific conditions can fail catastrophically if it is applied toward a different purpose with different prevailing conditions. The objective of this chapter is to show that the root causes of poverty differ between LDCs and DCs and that those differences are important to the design and deployment of MF tools in DCs. This chapter is organized as follows: a background discussion on how MF works, an evaluation of socio-economic differences between LDCs and DCs (in particular how poverty differs between them), a review of current performance concerns of DC MF, consideration of whether MF can be and/or is being adapted to effectively relieve poverty in DCs, and a conclusion that MF should be refocused before DCs commit to developing/adapting infrastructure for MF.

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