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05.28.2014

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The impact of microcredit: new studies

Since the appearance of microcredit, its impact has been constantly questioned by various studies. The Nobel Peace Prize, Muhammad Yunus, recognized as the pioneer of microfinance in Bangladesh promised that microcredit would end poverty that would then become history, visible only in museums.

Since then, several studies more or less serious had failed to get everyone to agree on the proven role of microcredit in poverty reduction.
However, over the years, feedbacks from users and actors in the sector have raised evidence to supplement the results of previously conducted studies.

Some research later, a more nuanced picture has emerged, saying that access to financial intermediation is helping poor families in developing countries to improve their living conditions.
To better understand the impact of financial access to poor families in developing countries, it is important to realize that they live and work in the informal economy; not by choice, but by necessity.
Overall, young or old people, they are considered "net savers". Young people need to put aside money to invest, and older people consume the savings they have accumulated during their working lives.

These poor households in the informal economy are both small enterprises that invest in their business but also savers who will use their savings in consumption. They need a wide and specific range of financial services.
Without access to formal financial services, households must sometimes rely on unreliable and costly informal savings mechanisms.

Indeed, access to formal financial services allows to better manage cash flow, to regulate consumption and to accumulate capital which all three are involved in improving the well-being of households durably.

Micro-insurance has an important role to play because it can help poor households cope with risks for their business and manage crisis situations.
Among the products of micro-insurance, agricultural micro-insurance seems to have a strong impact on agricultural activity of micro-entrepreneurs but also on their well-being.
Indeed, studies have shown that these insurance products push the farmers to increase the productivity of their lands what follows by higher income, less missed meals and less days of school absence for their children.

These studies have also shown that financial services such as microcredit also had a positive impact on the local economy. Indeed, the areas covered by the deployment of agencies and financial services helped to highlight an improvement in local economic activity and income.

Thanks to these efforts, national and global decision-makers adopt more financial inclusion as an important ingredient for social and economic progress. Moreover, the G20 has made financial inclusion, one of the pillars of its development schedule and many countries have made explicit commitments to expand financial inclusion.
Macroeconomic studies have shown that economies with strong financial intermediation implementation tend to grow faster and reduce income inequality. This explains why the G20 leaders have made financial inclusion a global development priority.

More and more examples are emerging about how the appropriate financial services can contribute to improving the well-being of households and stimulate small income generating activities.
Despite this much clearer picture of the impact of microfinance on the living conditions of the poor people and on the local economy, the debate continues between supporters and skeptics.

Source : Huffington Post

Tags : financial inclusion, microfinance, microcredit, micro-insurance, poor, developing countries, MicroWorld, G20, local economy, impact, informal economy, saving, financial intermediation