Microfinance, according to Otero (1999, p.
8) is “the provision of financial services to low-income poor and very poor self-employed people”. These financial services according to Ledgerwood (1999) generally include savings and credit but can also include other financial services such as insurance and payment services. Schreiner and Colombet (2001, p.339) define microfinance as “the attempt to improve access to small deposits and small loans for poor households neglected by banks.” Therefore, microfinance involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from the formal financial sector.The roots of microfinance can be found in many places, but the best-known story is that of Muhammad Yunus and the founding of Bangladesh’s Grameen Bank. We briefly tell the story now and return to Grameen’s experience in later chapters.
In the middle of the 1970s, Bangladesh was starting down the long road to build a new nation. The challenges were great: independence from Pakistan had been won in December 1971 after a fierce war, and two years later widespread flooding brought on a famine that killed tens of thousands (Sen 1981). Government surveys found over 80 percent of the population living in poverty in 1973–1974 (Bangladesh Bureau of Statistics 1992). Muhammad Yunus, an economist trained at Vanderbilt University, was teaching at Chittagong University in southeast Bangladesh. The famine, though, brought him disillusionment with his career as an economics professor. In 1976, Yunus started a series of experiments lending to poor households in the nearby village of Jobra. Even the little money he could lend from his own pocket was enough for villagers to run simple business activities like rice husking and bamboo weaving.
Yunus found that borrowers were not only profiting greatly by access to the loans but that they were also repaying reliably, even though the villagers could offer no collateral. Realizing that he could only go so far with his own resources, in 1976 Yunus convinced the Bangladesh Bank (the central bank of Bangladesh) to help him set up a special branch that catered to the poor of Jobra. That soon spawned another trial project, this time in Tangail in North-Central Bangladesh.
Assured that the successes were not region-specific flukes, Grameen went nation-wide. One innovation that allowed Grameen to grow explosively was group lending, a mechanism that essentially allows the poor borrowers to act as guarantors for each other. With group lending in place, the bank could quickly grow village by village as funding permitted. And funding—supplied in the early years by the International Fund for Agriculture and Development, the Ford Foundation, and the governments of Bangladesh, Sweden, Norway, and the Netherlands—permitted rapid growth indeed. Providers of Microfinance play a vital role in the economic development of many developing countries. It covers a broad range of financial services and insurance to the poor and low income earners and their micro enterprises.
They also offer training and advice to their clients. Since its birth in 1970’s microfinance has been growing rapidly with the aim to lift people out of poverty and promote economic growth. Its role and importance has been amplified amidst the global financial crisis when trust into formal banking is shaken. Microfinance appears to have been remarkably effective in helping the poor work their way out of poverty. The success of the Grameen Bank did not go unnoticed.
Institutions replicating its models prang up in virtually every region of the globe. Between 1997 and 2002, the total number of microfinance institutions grew from 618 to 2,572. Altogether, these institutions claimed about 65 million clients, up from 13.5 million in 1997 and still growing at 35% a year. The amount of money flowing to clients also continues to climb rapidly and the Grameen Bank has extended over 750 million dollar worth of credit in the past two years alone (Vives, 2006). The same project was replicated in India, South America, Africa, and Caribbean region boosting the informal sector and the Gross Domestic Product (GDP) of these nations through entrepreneurial development (Lafourcade, Isern, Mwangi, Brown, 2005).In East Africa, many rural areas have little or no access to financial services. In East African Nations, microfinance institutions have had endeavored to uplift small businesses through provision of affordable capital.
With the help of World Bank and Other donors, microfinance institutions have vigorously spearheaded strategies mainly for ensuring that small enterprises are catered for through financial loans with low interest rates. In Uganda and Kenya, small businesses form the backbone of the economy. Microfinance should have a pivotal role to play in the growth of small businesses. The MFIs have been of great importance in East African nations especially for small firms engaged in the retail sector by providing financial services and boosting their earnings and empowering the society (Basu, Blavy & Yulek, 2009).
Finance in East Africa had been quite scarce and the presence of micro-finance institutions in these nations had filled the void that was left by commercial banks by providing small loans at lowest interest rate in 1980s and 90s. In this context, microfinance institutions have emerged as the viable solution to poverty and empowerment by providing credit and savings services to the multitude of smallholder producers and entrepreneurs to make up the agricultural and entrepreneurial sectors in East Africa (Matebu & Abiye, 2010).The emergence of the micro-finance in Kenya has played a great role in the promotion of small businesses by advancing small loans for business investments.
Young entrepreneurs are also trained in financial management especially on how to plan well and access micro credit for their small business investments. This study is aimed at analyzing the impact of micro-finance in growth of small businesses. The success of micro-finance institutions requires good management and application of cutting edge technology to aid management decision making.