A CRITIQUE ON THE EMPIRICS OF MICROFINANCE: WHAT DO WE KNOW BY Niels Hermes and Robert Lensink (original) (raw)
Lack of collateral and access to credit has been one of the reasons why the traditional banking institutions do not extend credit to the poor. This has led to the increment in the poverty level of these individuals. For this reason, MFIs came into existence to play the role of providing financial services to the poor. The requirement of no collateral increases the risk of default and information asymmetry. Thus, the joint liability group lending model was developed to curb this. There have been debates on whether MFIs can provide services to the poor in a sustainable way and communicate the benefits of these services so as to reach those left out by the traditional banking institutions. Robinson (2001) stated that there is an absurd gap between the supply and demand for microfinance services. Among the economically active poor of the developing world, there is strong demand for small-scale commercial financial services for both credit and savings but the demands for these services are rarely met by the formal financial sector. One reason is that the demand is generally not perceived. Another is that many actors in the formal sector believe wrongly that microfinance cannot be profitable for banking institutions (Robinson 2001). In this critique, we will be analyzing and evaluating the effectiveness of joint liability group lending in reducing information asymmetries and also looking at the relationship between the financial performance of MFIs and their outreach services to the poor in developing countries.
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