Public Perception of Microfinance: A Cross-Cultural Study

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RESEARCH
How is Micro-finance perceived by citizens in a first world country and how is it perceived by citizens
in a developing nation?

Table of Contents
EXECUTIVE SUMMARY...................................................................................................................2
INTRODUCTION............................................................................................................................. 3
METHODOLOGY............................................................................................................................. 4
LITERATURE REVIEWS....................................................................................................................5
MICROFINANCE......................................................................................................................... 5
MICROFINANCING IN DEVELOPED COUNTRY............................................................................6
MICROFINANCING IN DEVELOPING COUNTRY...........................................................................9
FINDINGS AND DISCUSSION OF THE RESEARCH..........................................................................11
RECOMMENDATIONS.................................................................................................................. 13
CONCLUSION............................................................................................................................... 14
LIST OF REFERENCES.................................................................................................................... 15
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EXECUTIVE SUMMARY
Microfinance is the financial concept popularly used to provide funds for underdeveloped and
social excluded groups so as to generate the sources of income through small and medium-
sized business. This research study aims to identify and compare the perception level of the
people living in developed and developing countries towards micro-finance. This secondary
research adopted a qualitative framework under Interpretivism research philosophy and
inductive approach. It is observed that microfinance is highly popular among the developing
nations owing to the positive impact on living standard and poverty alleviation. It is being
increasingly popular among developed nation however are hindered by barriers. The
recommendations are that microfinance models should also be improved considering the
factors such as competition, accessibility of resources required, level of difficulty and scope of
lending in developed nations.
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INTRODUCTION
Microfinance is the type of banking services offered to low income or unemployed people or
groups who do not have any access to financial services. It is also referred to as microcredit
which is lending by the institution that participates in micro-financing areas. Additional services
such as checking and savings accounts and other micro-finance products are offered by many
banks. The main aim of microfinance is to provide an opportunity to impoverished people to
become self-sufficient. Microfinance proves to be support for small and medium enterprise that
contributes to the overall economy of the country (Bruton et al., 2015).
However, there is a huge difference between acceptance and perception level of people living
in a developed and developing the country. As people in the developing country positively
perceive microfinance to be beneficial for them as it helps in generating their source of income,
alleviating poverty and increasing social up-gradation (Bruton et al., 2015). In recent years, the
concept of micro-finance has appealed the developed nation due to its ability to reach out to
financially as well as socially excluded groups. There are various issues and limitations that
hinder the positive perception of the developed countries towards microfinance. This research
focuses on exploring the perception level of people of both developing and developed nations
towards micro-finance.
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METHODOLOGY
It is difficult to explore the different areas of microfinance as it is multifaceted. Interpretivism
research philosophy is adopted for the research. According to the research onion framework,
Inductive approach is undertaken for this study. The form of the research is categorized as
secondary and uses qualitative research analysis (Morgan, 2015). A total of 28 works of
literature will be selected for the research to identify the perception of the people of
developing and developed nations towards micro-finance. The data and information collected
from the literature review helps to reach out to a suitable conclusion and provide suitable
recommendations.
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LITERATURE REVIEWS
MICROFINANCE
Microfinance refers to the provision of loans, savings accounts, money transfers, insurance and
other banking services to the customers who have limited access to traditional financial services
majorly due to poverty. These services are usually provided to the people for starting a
productive activity or nurture their small or medium sized business. Various entrepreneurial
activities are fostered by micro finances (Newman et al., 2017). The emergence of the concept
of Microfinance has been crucial in emerging economies as it supported and encouraged
entrepreneurial activities and reduces poverty.
A Bangladeshi economist Muhammad Yunus developed microfinance in 1976 as the banker of
the poor. He established a Grameen bank in Bangladesh that provided microcredit which is an
extension of loans to impoverished borrowers (Newman et al., 2017). Since bank is generally
focused on lending to middle and upper-income clients along with other affluent classes, it
focused on disadvantaged households and entrepreneurs to gain access to affordable financial
services and support them in income generating activities, providing family needs and also
protect them from the risks related to daily life such as natural disaster, death, theft, illness.
Majority of the world is forced to live on a lower level of income every day. Microfinance is
emerged as a solution or alternative method for the individuals or group to improve their living
conditions by accessing to microfinance services and investing it into productive activities and
alleviate poverty (Chen et al., 2017). The concept of microfinance has a crucial impact on
emerging economies all over the world over the past two decades. It has not only helped in
minimizing poverty but also has decreased the level of unemployment, increase earning power
and aid people who are financially marginalized (Bateman, 2018).
In essence, the microfinance is referred to as an institutional mechanism to provide credit
support in a small amount. It is usually linked with small groups alongside other complementary
support such as training and other relative services to the people who do not have proper
resources and skills thus enabling them to take up economic activities (Cozarenco and Szafarz,
2016).
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MICROFINANCING IN DEVELOPED COUNTRY
Microfinancing is one of the major influencing factors for people in developed countries.
However the academic research related to microfinance in developed countries is limited
(Pedrini et al., 2016). The people in developed countries face different sets of issues which
result in creating different perception by them towards the microfinance concept. A study was
conducted by Ling et al (2017) in order to identify the perceived influences of No Interest
Scheme (NILS) loan on people’s financial capability on low incomes in Australia.
The interview was undertaken among 17 people who had repaid their loans regarding the use
of NILS, their management style of money, their attitudes towards the money. It was found that
the maximum benefit from the microfinance programs can be achieved through building
financial capability for the people alongside providing financial access (Ling et al., 2017). There
is little evidence of such loans contributing to the overall financial capability of the people
despite the acknowledgement regarding the usefulness of no interest loans.
Lending through microcredit for enterprises is one of the effective responses to face the major
societal challenge in the UK that is financial exclusion. Community Development Finance
Institutions delivers microcredit. It is difficult to clarify its alterity due to the possibility of
alternate substitute institutions categories. McHugh et al (2019) focused on the microcredit
complexities related to enterprise lending within the UK. It was suggested through the result
that their operating model had embedded the need of low-income individuals, being a
mainstream opposition for lenders.
The concept of microcredit lending is to offering fair credit facilities to the individual who is
financially excluded from using relationship banking practices. This concept provides the
opposition and evaluates the shift in the alterity of lenders along with the platform to introduce
regulatory changes for protecting these alternative-oppositional economic spaces (McHugh et
al., 2019).
Pedrini et al (2016) discussed the 4 technical issues in relation to the dispersal of microfinance
in developing countries. The authors suggested reframing the approach in order to apply it to
developed countries. They proposed certain recommendations such as financial institution
utilization for supplying microfinance products, regulatory framework adoption for
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microfinance, developing the alternative credit scoring in banks and network usage as social
collaterals with the aim to foster progress in the microfinance sector.
Financial services are offered through microfinance institution as an alternative finance
provider, to the people who are usually disqualified from the standard banking sector.
Additionally, Forcella and Hudon (2016) found that major of microfinance institutions are active
in developed countries while the microfinance sector is still young and developing in Europe.
The authors analysed the environmental performance of 58 microfinance institution of Europe
to find that there is the close relationship among the MFI institutions' size, investor concern
towards environmental performance and donor interest to the environmental performance of
the institution. Better environmental performance I linked to the provision of loans greater
than microcredits.
On the other hand, Atmadja et al (2016) studied the influence of microfinance on the
performance of microenterprises that are owned by women. They also observed the influences
of social, human and financial capital on enterprises’ performance. They revealed that there is
performance is positively related to human and social capital while negatively related to
financial capital. Performance is slightly significant related to the level of education with
reference to human capital.
It is frequently assumed that the demand of microcredit is inelastic; still, it is highly relevant to
understand the price demand elasticity for microcredit in order to design the financial products
as well as policies of a microfinance institution (Bogan et al., 2015). A unique survey instrument
was used to extract the demand schedules for a loan as well as MFI borrowers' elasticities in
the Dominican Republic. It was revealed that there is a correlation between certain
characteristics of borrower and demand elasticities by a client which are not homogeneous.
Majority of studies are conducted on identifying the benefits of microfinance to the society
which has caught the interest of developing and developed countries. Kim (2018) focused on
looking for the best micro-financing model for developed nation thereby considering South
Korea. Generic micro-financing model was analyzed which was utilized by the government as
well as central microfinance foundation of South Korea to understand the fundamental issues
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in using the model that does not have proper structure for the environment of a developed
nation.
Therefore it can be concluded that some of the microfinance models can be easily accepted and
can be proved successful in the developed nation as compared to the generic microfinance
model that aim towards supporting nurture startups.
Microcredit is potentially viewed as a tool to enhance the quality of life as well as poverty
alleviation by some of the scholars. Opportunities are created through a microcredit scheme for
the people to get involved in the entrepreneurship programme and also in self-employment
and also make them independent in creating self-economic (Misnan et al., 2017).
The microcredit program of Amanah Iktiar Malaysia (AIM) in Malaysia is lending based on the
group. It has become the platform for producing intervention related to entrepreneurship and
antipoverty thus increasing social empowerment and quality of life (Misnan et al., 2017). Hence
microcredit can be emerged as a good product for encouraging entrepreneur development and
decreasing of poor and low-income level, therefore, the government of Malaysia along with the
Amanah Iktiar Malaysia must re-evaluate and monitor the method applied and encourage the
people among low-income groups in urban areas to join this program (Misnan et al., 2017).
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MICROFINANCING IN DEVELOPING COUNTRY
Microfinancing and microcredit have emerged as a boon to the developing and underdeveloped
countries as it allows them to create employment opportunities, improve the standard of living,
economic development and most importantly poverty alleviation (Egharevba et al., 2016). The
two main alternative strategies are microcredit as well as SMEs finance that create employment
as well as microloan opportunities in various countries with low income.
It is found that SMEs accounts for over 80 per cent in the world which accounts for around 60
per cent of employment in the private sector (Kamara, 2017). These enterprises have made a
large contribution to innovation as well as support development in regions. Microcredit
programs are the most relevant instrument for addressing the credit constraint and have an
important role in enhancing the income for the household, reduction in income inequality and
creation of employment for the households with low income (Kamara, 2017).
Ganle et al (2015) identified that the most commonly used strategy to empower women is
microcredit for women. The authors undertook the qualitative research among the rural
women who are engaged with the microlending program run by an NGO in Ghana. They found
that access to microcredit by rural women had different micro level effects. There were some
women who were empowered by the access to credit while some women did have little control
on utilization of loans and were not comfortable (Ganle et al., 2015). There were other women
who were subjected to harassment and were on edge because of their inability for timely
payment of a loan.
Mutua (2017) observed that the major concern for the government of Kenya was the reduction
in poverty as it is essential for the country to achieve economic growth. Various policies along
with the microfinance credit were implemented by the Kenyan government to expand the
financial access to the poor. The author examined the effect related to microfinance on the
reduction of poverty in Makueni County. He found that the effect of microfinance services is
positive as well as significant in reducing the poverty in Makueni County.
It is recommended that the support of the finance must be provided to microfinance
institutions that operate within the country, which can be forwarded to the local people as
microcredit thereby facilitating rapid growth in the economy (Mutua, 2017). They can
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undertake the training to make their customers undertake the best skill to manage their
finances and improve their income from their business.
The critical component of international development is empowerment which acts as a vehicle
for poverty reduction. Kulb et al (2016) conducted qualitative in-depth interviews in order to
inspect the procedure related to empowerment of women through a community group of
microcredit. The 3 different phases of empowerment experienced by the women are
enlightenment, empowerment and group movement.
Further, Batinge and Jenkin (2018) focused on the failures of microfinance in reducing poverty
as well as food insecurity in the rural northern regions of Ghana. It was observed that the
effective financing tool to improve the rural northern women for reducing their poverty level,
as well as chronic food shortage, is Susu which is an informal form of microlending and saving.
But the major standing blocks against this program is the patriarchal environmental belief.
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