CHAPTER THREE: EMPIRICAL LITERATURE REVIEW
Empirical literature on microfinance is still anaemic and most studies focus on evaluating the impact of the industry on the poor community. What explains microfinance lending interest rates is a poorly understood phenomenon and it can be attributed to the youthfulness of the industry and low level of research in Sub-Saharan African (Tijssen R. 2007:209).
The theoretical literature mentioned above will be checked against global, regional, national, and local empirical studies showing the extent of participation of the poor in microcredit services, reasons for not participating or inadequate participation, and the economic benefit to the poor from microcredit services
Historical Journey of Microfinance across the Globe
Sanjeev K. (2011:20-21) summarizes the historical journey of microfinance across the globe as follows, Citing from mixed market data, Chitra K., and Sangeetha S. (2013:40-48) describe how the growth and performance of the microfinance sector from a global perspective during the recent years has shown distinct differences among regions like Africa, East Asia and the Pacific, Eastern Europe, Central Asia, Latin America and the Caribbean, Middle East and North Africa, and South Asia (see Table 3.2 below).
Based on Table 3.2, Chitra K., and Sangeetha S. (2013:40-48) said that:
“The number of MFIs has gone up for LAC, MENA, and SA regions, while in the other regions, it is observed to have larger increase of MFIs from 2007 onwards. Furthermore, the decline in active borrowers has been reflected in the reduction in deposit too. The huge decline in number an loss rate is found to be very high in MENA compared to other regions which accounts for 6.38% odepositors’ (sum) statistics shows an alarming picture throughout the world. Moreover, the lof the loan portfolio during the year 2011. In spite of having a large loan portfolio, LAC has only 1.83% extent of loan loss rate, which promotes additional portfolio growth”.
Furthermore, Chitra K., et al (2013:40-48) conclude that the global scenario is not promising for the MFI industry as such. Though some economies had booked loans, they are struggling hard to manage their expenses. State of the Microcredit Summit Campaign Report 2012 said that a number of initiatives like values of responsibility, corporate ethics and social performance management have emerged to address the field’ challenges. MFIs have to adopt new strategies to bring back their customers and as well reduce their operating and administrative expenses.
Supporting the conclusion of Chitra K., et al and (2013:40-48), Micro Rate (2009:1-3) describes that the rapid growth of microfinance investment seen in years past took a significant hit in 2008 as the financial crisis started ramping up and investors became cautious and more prudent, questioning the resilience of microfinance against the global financial market.
Moreover, Micro Rate (2009:1-3) also concludes that investment in microfinance was previously characterized by an exuberance fed from its success and social mission of helping poor entrepreneurs. Growth of MIVs (Microfinance Investment Vehicles) far exceeded MFI growth and concerns were beginning to arise regarding how long this could continue without jeopardizing asset equity. From this point of view, the slowdown in 2008 may have been a blessing in disguise.
Microcredit service in Africa
Overview of microfinance in Africa
Over 50 per cent of Africans live on less than $2 a day. Moreover, all of the 21 countries listed in the United Nations’ low human development ranking are in sub-Saharan Africa. There are several positive signs: more than 35 per cent of Africans live in economies that have seen sustained growth of more than 4 per cent a year for the last 10 years, setting the stage for many Africans to enjoy a better life. However, the continent is still under-served by financial services. The cost of bringing micro finance services to Africa is higher than in other regions of the world because Africa has many vast and sparsely populated rural areas, higher rates of illiteracy and HIV/AIDS, and a widespread lack of identity documents (The World Bank 2008:54).
Furthermore, the World Bank (2008:54) mentioned that Africa is on the move. Total gross domestic product (GDP) in the region is currently growing at 5.7 per cent, although the country-by-country distribution of this growth is quite uneven. Governance is improving, food security is a growing priority of policymakers, and commitments to universal primary education have increased dramatically. The stage is set for many Africans to enjoy a better life. But without access to basic financial services – savings, credit, insurance – Africans will remain at the margins of economic opportunity with little hope of realizing their tremendous creative potential. Beginning in the 1970s, a microfinance revolution swept through Asia and Latin America, helping countless millions of poor people get the economic boost they needed to start small businesses and work their way out of poverty. Somehow, the revolution bypassed Africa.
There is good news on the access to finance front. Worldwide, the global cellular market is growing the fastest in Sub-Saharan Africa (SSA), with more than 65 per cent of the population living within reach of wireless voice networks. Kenya is the shining example globally for how this technology can be leveraged to offer financial services at greater scale and lower cost. Investor interest is increasing, albeit from a low base, and is spurring the growth of new institutions. Policy makers are engaged and making reforms to improve the rules and regulations for markets. More institutions are for-profit, paving the way for more efficiency, sufficient capital for scale, and innovations. Uptake of deposit services is broad, even greater than for credit services (CGAP and MIX 2010:2-18).
Yet, serious challenges persist and threaten this positive momentum. Many of these challenges are not new. Operating expenses remain among the highest in the world. Returns are falling. Portfolio quality has been stubbornly poor, and, in some markets, it has gotten worse over the course of the year. Supervision is very weak. And the successes remain far too concentrated in certain markets and specific institutions, with the overall penetration still very slow and progress toward reaching scale sluggish (CGAP and MIX 2010:2-18).
A large number of MFIs have set up networks in many African countries, taking advantage of increased pressure on governments to deregulate the economy and the financial sector, encourage competition in all sectors, and create a conducive environment for increased production. Thus, micro-finance delivery has become an attractive business over the last decade in Africa. Such MFIs operate in a niche market because they address the needs of those clients who are considered ‘high-risk’ by bigger banks (Sunita P. 2003:9-21).
Moreover, Sunita P. (2003:9-21) shares that field observations show that most MFIs in Malawi and Ethiopia can be categorised as profit oriented, with a clear business approach, with a good network into the rural areas, and with minimum expenditures on training or group mobilisation, allowing for high repayment rates with minimum risk exposure. Discussions with different stakeholders revealed an underlying assumption that simply the existence or operations of an MFI in an area will automatically address poverty. MFIs, on the other hand argue that they are not required to and do not always have the responsibility for justifying whether their activities reduce poverty. Some MFIs have, however, undertaken impact analysis studies on a need-basis, which reveals that income has been increased amongst their clients. Nevertheless, this is very much anecdotal and limited to some cases and cannot be proven or established as a long-term trend
Scope of financial services offerings in Africa
Table 3.3 lists the top 10 countries by penetration rates of borrowers as well as savers. Incidentally, these 10 countries had the greatest penetration rates for both groups. Five of them are from West Africa, indicating that microfinance is likely already meeting more of the demand here than in the other regions. Despite having three countries in this list, East Africa continues to exhibit rapid growth; the market here is not yet saturated
CHAPTER ONE: INTRODUCTION
1.1 Background and rationale of the study
1.2 Statement of the problem
1.3 Objectives of the study
1.4 Research questions
1.5 Significance of the study
1.6 Scope of the study
1.7 Limitations and challenges of the study
1.8 Structure of the study
CHAPTER TWO: LITERATURE REVIEW
2.2 Historical background of microfinance/microcredit
2.3 Theoretical and conceptual literatures of microcredit interest rate
2.4 Microcredit definitions and key principles
2.5 Key principles of micro-credit / finance
2.6 Microcredit modality
2.7 Financial sustainability, outreach, and impact
2.8 Combining outreach and sustainability
2.9 Microcredit and the poor
2.10 Microcredit loan interest rates and the poor
2.11 Criticisms of microfinance/microcredit
2.12 Global trends of the microfinance market
2.13 Relevance of the theories to the study
CHAPTER THREE: EMPIRICAL LITERATURE REVIEW
3.2 Historical Journey of Microfinance across the Globe
3.3 Microcredit service in Africa
3.4 Microcredit services in Ethiopia
3.5 Microcredit studies in Tigray
3.6 Empirical reviews of some other countries
3.7 Closing remarks
CHAPTER FOUR: RESEARCH DESIGN AND METHODOLOGY
4.2 Study area
4.3 Selection of microcredit providers
4.4 Sampling of the study
4.5 Sampling of microcredit providers
4.6 Background of the research strategy and design
4.7 Research methodology
4.8 Interview procedure
4.9 Research reporting and presentation
4.10 Measures for reliability and validity
4.11 Ethical considerations
CHAPTER FIVE: RESEARCH RESULTS AND DISCUSSION
5.2 Results of descriptive analysis
5.3 Income status of the respondent’s household
CHAPTER SIX: SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS
6.2 Key findings of this study
6.3 Major conclusions
6.4 Major recommendations
6.5 Suggestions for further research
7. Overall conclusion
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