Economics Assignment Microfinance Institutions
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Added on 2019-12-03
Economics Assignment Microfinance Institutions
Added on 2019-12-03
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Literature Review
Table of ContentsCHAPTER 2: LITERATURE REVIEW.........................................................................................1a. Importance and growth aspects of micro finance institutions............................................1b. What is economic downturn as well as its impact upon the economy and micro financeinstitution................................................................................................................................4c. Interrelationship between the global economic downturn and growth of micro financeinstitution................................................................................................................................8CHAPTER 3: RESEARCH METHODOLOGY...........................................................................10Research Design...................................................................................................................11CHAPTER 4: DATA ANALYSIS AND INTERPRETATION....................................................15REFERENCES..............................................................................................................................22APPENDIX....................................................................................................................................25
CHAPTER 2: LITERATURE REVIEWLiterature review represents the theoretical analysis of secondary data sources. In this,researcher critically evaluates the books, journals and research paper to find out valuable insightin relation to the subject matter (Goudarzi and Ramanarayanan, 2011). It provides moreassistance to the researcher in accomplishing the research in an effective manner. In addition tothis, it also develops understanding about the subject area along with their advantages anddisadvantages. It acts as a guide which helps the researcher in getting depth knowledge about thetopic. Micro finance institutions can be defined as a those institution who offers financialassistance to the lower income group at very concessional rates. Micro finance institution plays asignificant role in the growth and development of the economy. This literature review aims at toevaluate the economic down turn at global level in the recent past. Besides this, it also criticallyassesses the potential growth of micro finance institutions in Mysore. Along with it, it alsocritically discusses the relationship between global economic downturn and growth of microfinance institution in Mysore. a. Importance and growth aspects of micro finance institutionsMicro finance institutions refer to those institutions which provide financial assistance tolower income group or segment of the people. They offer financial services to the entrepreneurand small sized business organization which are unable to approach bank to meet their financialrequirements. It includes credit union, commercial bank, cooperatives and other governmentinstitution who offers loan, depository and other financial services to the customers (Karlan andValdivia, 2011). Cooperative banking can be defined as a retail banking institution which takesdeposits and offers lending facilities in most part of the world. Cooperatives work on the basis ofthe different values such as self responsibility, equality etc. In addition to this, credit unions are termed as nonprofit financial cooperatives who offersavings, credit and financial services to their members. It is the group of people who belong tospecific community, religion and place of employment. In this, each member of the groupdeposits fixed amount in union as per the predetermined norms (Kothari, 2010). Besidesdeposits, it also renders lending facility to members of the group at very concessional rate ascompared to the other sources of funding. Along with it, repayment loan system of credit unionis also very simple as compared to the other financial institutions. 1
As per the view point of Peters and et.al. (2012) micro finance institution helps poor andunemployed people which further contribute in reducing the rate of the poverty. In the present scenario, micro finance institutions play a significant role in promoting theeconomic development. This statement is argued by that it is not necessary that financialassistance provided by micro finance institution contribute in the economic development.Growth and economic development of the country highly depends upon effective concept,strategies and policies framed by the entrepreneur. For example: If entrepreneur fails to makeoptimum utilization of finance which are provided by the micro institutions then growth anddevelopment aspects in negatively affected. Thus, it is very difficult for the financial institutionto assess that which investment gives positive result or not. According to Kothari (2010) micro finance institution also contributes in economicgrowth by supporting the entrepreneur and small sized organizations. Micro finance institutionoffers financial support to the entrepreneurs at very concessional rates as compared to otherfinancial institutions. Through this, micro finance institution encourages the entrepreneur tothink unique or something different. By providing financial services, micro financial institutionprovides opportunity to the entrepreneur to implement their new ideas and strategies. Throughthis, entrepreneur also assists in raising standard of living of the people. In addition to this,micro finance institution also plays crucial in development of sector such as agriculture and otheraspects. Due to lack of the sufficient fund farmers are unable to produce grains by taking intoconsideration the most effective and innovative techniques. In this condition, micro financialinstitutions provide assistance to the farmers by fulfilling their financial needs and requirementsat the cost effective rates. Prosperity of the country is highly dependent upon agricultural aspects.In addition to this, micro finance institution secures farmers and rural people from theexploitation of money lenders. However, it is to be critically evaluated by the Peters and et.al.(2012) that still there are large number of people who take financial assistance from the moneylenders due to the low awareness towards these institutions. As per the view point of another Venkatesh and Vanishree, 2014 micro financeinstitutions encourages rural people to save their money. By introducing attractive rate of intereston the deposits micro institutions can develop the saving habit among the individuals. MFI'splays a vital role in reducing the gap between formal financial institution and rural people. In the2
present era, large number of borrowers prefers to take financial assistance from micro financialinstitution in comparison to other institutions. Along with it, micro finance institution focuses onunderstanding the needs and requirements of poor people. Through this, they are able to deliverbest services to the lower segment of the people by complying with their needs.Growth aspect of the micro finance institution is high over past decades. As per the viewpoint of VenuGopal and Rao, 2014 due to the easy procedure to take financial assistance andcost effective interest rates large number of people prefer to approach MFI's. During the periodof 2003-2008 micro financial institutions have grown by 21%. Along with it, the portfolio oforganization has also grown by an average of 34% in the same period. Micro institutions providefinancial support to the backward people which help the country in decreasing size ofunemployed people. Besides this, they also help farmers and rural people who facilitateeconomic growth and development in the country. Thus, it can be said that growth potential ofthe micro finance institution is very high as compared to other financial institution or sector.However, it is to be critically evaluated by Boyer and Blazy (2014) that growth potential orperformance of micro finance institution is highly dependent upon favorable economicconditions and policies. Customer preference and needs are also affected by the economiccondition which takes place within the country. Economic crisis which takes place at global levelalso affects the growth potential of micro finance institution. In 2008, there is the high slowdownin the economy due to which many micro institutions were forced to wind up many branches.Thus, economical conditions and aspects also place significant impact upon the growth aspect ofmicro finance institutions. In accordance to Yadav (2014) the growth aspect of micro financial institution can bevisible in many aspects. More than 800 NGOs are involved in delivering financial services tothe customers. Along with it, approximately more than 350 new cooperatives provide thrift andcredit services to people. In addition to this, formal financial institution has failed to fulfill thefinancial needs of poor people. By realizing this fact micro financial institution has started toprovide financial assistance to lower segment of the people. All the above mentioned aspectsshow that the growth aspects of micro finance institution are very high as compared to the otherfinance institutions. According to the view point of Alem and Townsend (2014) there are many sub hubs ofMysore which are still not developed. In addition to this, there are many rural people are resides3
in Mysore who approach micro financial institutions to meet their financial needs andrequirements. Micro institutions which are established in Mysore provide financial services andassistance to the lower income group of the people who economic background is not very strong.Micro financial institution which works in Mysore plays a significant role in making contributionin the organizational growth and development. Statistics of Mysore states that people of this cityprefers more to take financial assistance from the micro financial institution. Moreover, microinstitutions provide funding at the concessional rate. This aspect attracts entrepreneurs and smallbusiness organization to approach MFI's for the financial support. In addition to this, microfinancial institutions that operate their business in Mysore provide high interest on deposits ascompared to the other financial institution. In addition to this; MFI's gives more priority to the backward and rural people incomparison to the people who have strong background. Thus, growth aspects of micro financialinstitution are very high in Mysore. However, it is to critically evaluate by Alum and Townsend(2014) that growth of the financial institution is not only dependent upon the demand and needsof the customers. Economical situation or aspects such as inflation and deflation closely affectsthe growth potential of micro finance institution. As activities and operations of micro financialinstitution are not only restricted to national level but also they are also affected by thehappening which takes place in the international market. Any changes which take place in theglobal market highly impact the activities and functions of micro financial institution. Thus,micro finance institution shows growing or emerging trend but economical crisis which arose inthe past place negative impact upon such kind of institutions. b. What is economic downturn as well as its impact upon the economy and micro financeinstitutionEconomic downturn refers to the slowdown in the economic activity of the country. Asper the view point of Fletschner and Kenney, (2014) economic downturn is the part of the tradeor business cycle which indicates that country is entering into the recession which closelyhampers the growth and development aspect of the country. There are several reasons due towhich situation of economic downturn is arises includes lower economic growth, falling assetprices and investment, increasing unemployment as well as increasing government borrowing.Economic downturn is the critical situation which may cause of the period of recession arises inthe economy or country. It is contradicted by Borio (2014) that there are many other factors4
which may cause of the recession or situation of slowdown arises in the economy. High interestrate is also one of the main cause due to which condition of recession is arises. During the periodof slowdown, investments are not encouraged in the economy and there by impacts theproductive activities of the respective country. Besides this, during the period of slowdownconsumer are not likely to spend money. Investors think that if economy is bad then there is nochance to get higher investment. Thus, psychological state or mindset also impacts theeconomical aspects. In addition to this, in economic downturn wages of the workers is alsoreduced which place impact upon their purchasing power as well. Slowdown in the economy represents that gross domestic product of the country isdecline which closely impacts the activities of the respective economy. Thus, period ofslowdown places many negative impacts upon the growth potential of the country. However, it isto be critically evaluated by Machado and Mata (2015) that slowdown is not static condition ofthe economy. Economic condition is dynamic in nature which can be changed by the country bymaking sound strategies and policies. In the period of inflation purchasing power of thecustomers is increase. Besides this, investment is also encouraged in the economy during thisperiod which proves to be more fruitful for the country. Thus, period of slowdown closelyimpacts the economical aspects and activities. Global crisis comes in existence in 2008 when two largest banks Marill lynch andLayman brothers declared that they are become bankrupt. There are numerous US and othernations companies that have their account in these banks. Due to bankruptcy of these banksturmoil comes in world economy and concern about economic health were revealed by the majoreconomists. The main reason behind such case was loose risk management system of thesebanks. In USA people takes a home loan at a very low interest rate by mortgaging their houses.This trend was continuing from many years (Karlan and Valdivia, 2011). It is evident that peopleof USA do not make prudent use of money and they start using loan amount to meet theirpersonal expenses. In 2007 prices of these houses start falling and many people show theirinability to make payment on time. Banks of USA does not give any importance on these trendsand them allotting more and more loan. As a result, number of defaulters in USA startsincreasing and due to devaluation in house prices it become difficult to recover loan. By the timethese banks take steps situation become out of control and these institutes were compelled todeclare their bankruptcy.5
Due to bankruptcy of these banks corporate greatly affected and economy of USA startfalling. As per fact, form 2007 this trend commenced and at that time growth rate was almostnearby to zero. In 2008 GDP of USA becomes negative. It is well known fact that USA is a largemarket and it is largest importer and exporter of commodities. Due to negative growth rate;production fall and due to this reason demand for raw material declines (Goudarzi andRamanarayanan, 2011). This affects other nation’s economy like China, Brazil and UK etc.Moreover, unemployment rate also reached to 8-10% which was very high. Due to this reasondemand for products also declines in USA. As a result major exporting nations of USA greatlyaffected by downfall in USA economy. The economy of nations that have good tradingpartnerships with nations that export products to USA also affected indirectly due to negativegrowth rate of USA economy. In this way USA economy poor performance affect entire worldand global recession comes in existence.This entire scenario affects entire globe in many ways. In European nations and USAGDP declined, inflation rate increased and unemployment rate skyrocketing. Due to rescissionEuro zone also face a lot of problems in economy. Countries like Greece economy growth fall to-5%. At that time unemployment rate in Greece was 5% but in 2015 it grows to 25%. In case ofgrowth rate nearby results were observed in other nations of Euro zone. In all European nationsat that time unemployment rate was very high and same trend was observed in case of inflation(Venkatesh and Vanishree, 2014). Due to this reason demand in European nations also declineand this scenario further add fuel to the problem. Hence, it can be said that crisis in USA becomecrisis for entire world and longer time is taken in order to overcome this crisis to some extent.As pert the view point of Shepherd and Page (2015) global financial crisis which arises inthe period of 2007-08 placed high level of influence upon the rural as well as micro financialsector. As micro financial institutions are closely related to global financial market. Thus,economic crisis which arises at global level closely affects the activities and operations of themicro finance institutions. Global financial crisis places more impact upon the micro financialinstitution that is situated in Mysore. Moreover, micro financial institutions are not limited to thenational level but also they worked at global level (VenuGopal and Rao, 2014). Therefore, ifminute changes which take place in the economic market closely impacts the business functionsand activities of micro finance institutions. During the currency crisis, people are not interestedto make investment in their business operations. Thus, they are not interested in taking financial6
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