Micro Financial Institutions: Functions and Significance

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Services for the Unbankable

Even though the use of banking services has become a part and parcel of an average citizen’s life, there are still people, who do not use banking because of the lack of access to the corresponding services. However, in certain scenarios, the need to provide banking services to the specified denizens of the population emerges. Herein the significance of the so-called MFIs (microfinancial institutions) lies.

Created to provide the corresponding banking services to the people, who live in remote regions and, therefore, have no opportunity for accessing banks, MFIs are subject to specific banking regulations and, therefore, are capable of carrying out financial transactions on behalf of the organizations, which they represent. Identified as mobile banking, the specified approach to meeting the needs of the denizens of the population with no access to the banking services has become quite popular.

It should be noted that several types of MFIs exist; these are formal, semiformal and informal MFIs. While the former are fully accountable and controllable by the corresponding banks and financial organizations, the semi-formal ones only require registration for business operations. The informal MFIs, in their turn, do not require registration. MFIs, however, can also be classified according to their nature; while there is a range of governmental MFIs, some of the existing microfinancial institutions can be identified as NGOs (Todaro and Smith 761).

This is another reason for MFIs to start viewing unbankable people as their target clients; with other leaders apart from governmental bodies at the helm, MFIs are capable of developing a more flexible policy for the provision of their services and, thus, include more customers into their scope. The equitable access promoted by these organizations helps people from poor households enjoy advanced financial options: “They pool resources to spread risks for both borrower and lender” (Hailu 1).

The Role of an Expanding MFI Sector in the Economic Development of a Developing Country

Because of the opportunities, which MFIs provide to the people coming from poor economic and financial background, the role of the MFI sector in the economy of developing countries can be considered beyond impressive. MFIs may serve as a boost for the stet economy by souring both the emergence of local SMEs and the buying power of the citizens.

It should be noted, though, that the creation of MFIs is not enough for enhancing the state economy and reducing the poverty rates within a specific country or a region thereof. According to the latest data retrieved from the reports provided by the corresponding MFI facilities, the latter still fail to embrace a range of households beyond the threshold of poverty: “Of the 193.6 million poor families worldwide, only 47.8 per cent were within reach of MFIs” (Hailu 1). The specified phenomenon can be attributed to the geographic location of the target population; according to the statewide statistics, most of the poor households that the MFI organizations are incapable of reaching are located in remote areas.

The economic and financial issues regarding the operations of the MFI organizations are, therefore, related closely to the technological opportunities provided to these companies. It can be assumed that the integration of advanced technology into the framework of the companies’ operations will help address the problem; however, the expenses that will follow may jeopardize the success of MFIs.

Therefore, MFIs cannot possibly play the role of a tool for reducing poverty rates statewide. Instead, it should be viewed as an opportunity for households to explore new financial options. In addition, MFIs should play the role of representatives of the corresponding banks in the areas that they are located in.

Works Cited

Hailu, Degol. “Equitable Access to Financial Services: Is Microfinancing Sufficient?” International Poverty Centre, One Pager 59.1 (2008), 1. Print.

Todaro, Michael P. and Stephen C. Smith. “Finance and Fiscal Policy for Development.” Economic Development. Upper Saddle River, NJ: Pearson. 729–772. Print.

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