Research Proposal on "Microfinance the Commercialization"

Research Proposal 5 pages (1665 words) Sources: 8 Style: APA

[EXCERPT] . . . .

Microfinance

The Commercialization of Microfinance: What is it? Who is it Profitable to?

My travels around the world have allowed me to see, first hand, the discrepancies between the rich of the Western world and the poor of developing countries. In the West, a certain attitude seems to accompany wealth, that is, the attitude that wealth should be kept by the person who earned it, and little should be shared. In the East, however, even the poorest were willing to share what they owned, take risks, and stretch what little they had. Perhaps this is what makes them good entrepreneurs. Perhaps, it is this reason why the women, who are traditionally tasked with the job of making ends meet, seem to be excelling as entrepreneurs in many of these underdeveloped countries. For instance, women have been able to get microfinance loans to start such small businesses as a village pay-per-use telephone company.

But while the surge of support that once rallied behind microfinance is still there, to a degree, it does not rally without reservation. While the anecdotal stories regarding the successes of microfinance are abundant, no data or study has actually backed up the widespread success of microfinance; no empirical study can determine whether or not this type of lending program is making a difference in macroeconomics. Furthermore, while more and more people have gained access to microfinance in some of the world's poorest locations, all of the world's most impoverished have not been reached by any means (Coleman 2005). In fact, only one microfinance institution has remained viable in Pakistan since 2003 (Katz 2008).

Of course, microfinance has been growing and changing since it was first implemented. This, at least, suggests that it is an elastic and malleable force that could be shaped into the savior of the world's poorest as the years go on. About 34 years ago, microfinance was developed by Dr. Mohommed Yunus and some of his followers in Bangladesh. Yunus thought that making small loans to some of the world's poorest would allow them to support themselves and build their country's economy based on the high rate of repayment. Indeed, Microfinance loan repayment is at around 100%, and the demand for it is staggering, according to Maria Otero of the Council on Foreign Relations ("Microfinance" 2008). Soon, microfinance would come to encompass more and more, including more financial services for the poor, such as savings accounts, money transfers, insurance, and other services. But as microfinance exploded, so did hopes for its success, which some, like Coleman (2005), believe were overzealous, now casting a poor light on microfinance because it has not lived up to these high expectations (Coleman 2005).

Yet another controversy surrounding this issue has been recently introduced, and that is the commercialization of microfinance. According to Otero ("Microfinance" 2008), at the end of the 1990s to the beginning of the 2000s, many of the nonprofit organizations that had been working as microfinance institutions became banks and other for-profit groups. For instance, BrancoSol in Bolivia, a non-profit lending institution, had five for-profit competitors within ten years. The for-profit competition even encouraged the banks to make their products better and better available ("Microfinance" 2008). Although competition and for-profit microfinance services have so far developed institutions that were to the advantage of the poor, this may not always be the case. The fact remains that microfinance still needs to reach millions more people, and Otero suggests that the current microfinance model cannot do that ("Microfinance" 2008). In addition, as for-profit institutions come into the microfinance market, Otero wonders how the customer can be protected. That is, will for-profit organizations exploit the poor people coming for microfinance loans in order to earn more money, or will the competition encouraged by these for-profit groups be enough to reach wider and build deeper in terms of the developing world economy.

Thesis & Significance

My thesis argues that the commercialization of microfinance is, indeed, profitable. Dr. Yunus's creation of microfinance was a groundbreaking discovery in the ability of poor people to help themselves. To this end, he won the Noble Peace Prize in 2006; but Yunus's idea was not done evolving. Instead, incorporating for-profit companies into this realm traditionally reserved for non-profit organizations will give Yunus's idea the boost it needs to begin to reach the millions of others who still have no access to financial services. Clients, the poor, will get better service because for-profit banks will compete, offering different rates, benefits, advice, and technologies. In addition, these competing services will not harm the clients, as clients can simply choose to move their debts to another institution should one institution fail to meet their needs. Not only will this empower clients in the realm of business, teaching them to be entrepreneurs, but it will also encourage them to understand dealings in the world of business and finance, so that they will be equipped to handle such relationships with more developed countries, should they be given the chance. Furthermore, clients will receive monetary, educational, psychological, and social advantages through the commercialization of microfinance, which will help them build a larger income, learn how to operate a business and within the business sphere, feel in control of their own destinies, and realize a sense of social responsibility.

In addition to on the individual level, the commercialization of microfinance has several benefits on the macroeconomic level. Competing institutions is the first step to building a viable market economy. Learning how to compete on the financial realm will allow businesses to understand competition within the market environment, encouraging them to invest in other mediums, to trade with other countries, and to master the concepts of opportunity cost and production possibilities, which will move them forward in self sustainability.

Brief Review of Literature

Literature on the topic of microfinance is vast and varied. Coleman (2005) argues in her defense of the concept that it may have simply fallen short of its one-time advocates' lofty goals. Furthermore, she states that improvements could be made to the current structure of microfinance. For instance, she states that microfinance institutions must realize that some people are not cut out to be entrepreneurs, and these are the ones that most often default on their loans. Microfinance institutions, she suggests, should screen applicants using a test of business concepts and should offer aid, not loans, to those who do not have them (Coleman 2005). The commercialization of microfinance would provide for this, as companies making money off of loans usually try not to lend to those who will not pay the loans back.

For commercialization to happen effectively, however, O'Neil (2005) discusses Marilou Uy's, the financial sector operations and policy director for the World Bank, three steps to successful commercialization: "the down-market entry of commercial banks, microfinance institutions becoming more commercially oriented, and the establishment of partnerships between corporations and specialized microfinance institutions" (O'Neil 2005). In order study the success of this commercialization, which Uy says must be done following a three-fold path, the Asian Development Bank ordered several reports, which focus on the success and extent of commercialization in certain countries. Charitonenko and Rahman (2002) found that "negative perceptions of commercialization" were one major challenge to microfinance commercialization in Bangladesh (p. 9). Similarly, Charitonenko and Afwan (2003) found that commercialization of microfinance institutions in Indonesia still suffer from misconceptions about for-profits taking advantage of the poor. In addition, they found that commercialized microfinance institutions have not, as of now, reached all demand. In the Philippines, however, Charitonenko (2003) found that "there is a growing realization that commercialization allows MFI's greater opportunity to fulfill their social objectives of providing the poor with increased access to an array of demand-driven microfinance products and services" (p. 9). Finally, when looking at South and Southeast Asia as a whole, Charitonenko, Campion, and… READ MORE

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