Introduction - Economic Challenges in Developing Countries
Microfinance has both positive and negative sights. Apart from the positive sights, the negative sight of microfinance has affected more than the positive sight. In developing countries, the impact of microfinance has been negatively increased. In this research, the negative impacts of microfinance will be delivered with the help of appropriate discussion. Most developing counties are affected by this negative behavior of microfinance, to deliver knowledgeable outcomes on this topic to understand the topic properly is the primary aim of this research. This research proposal is made depending on the objectives that need to be fulfilled in the dissertation with appropriate discussion. This research proposal will help to understand the important aspects of the topic shortly, which will be enhanced in the discussion. In this proposal, there are some important discussions that are mentioned in the subsections like the problem statement, the significance of the research, the literature review, and the methodology, which contains the data collection and the design of the research. This research proposal will help the readers to understand the main objectives and the overall dissertation discussion, which will be delivered in the dissertation.
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Microfinance is known as microcredit, this microfinance or microcredit is a service of the bank that is provided to people that are unemployed or people that are bounded by a scale of low income (Abera and Asfaw, 2019). This service of the bank is also provided to the group of people that has no financial services. Low-income and unemployed individuals receive microfinance services.
The idea of microfinance is not new. Since the 18th century, small businesses have been in existence. Jonathan Swift introduced microcredit for the first time in Ireland with his Loan Fund program, which aimed to improve living conditions for poor Irish citizens. In the 1970s, a new type of microfinance became popular (Abrar et al. 2021). Grameen Bank, which Muhammad Yunus founded in Bangladesh in 1983, was the first to gain attention. Customers of Grameen Bank can join “Choices,” a list of basic ways poor people can improve their lives, in addition to receiving credit. The majority of loan providers are microfinance institutions (microloans range from $100 to $25,000), but many banks also offer checking and savings accounts and microinsurance products. Services and financial services are offered by some banks. Business training. In the end, microfinance aims to help the poor become self-sufficient.
In developing countries microfinance has been impacted negatively, and delivering the needful discussions to understand the topic is the primary aim of this research (Kumari et al. 2019). There can be some problems or disadvantages of microfinance that will give impact negatively, to discuss those negative impacts will be the secondary aim of this research. This research is bounded by some objectives that need to be fulfilled. The objectives are discussed below,
To deliver the problems or disadvantages of microfinance.
To evaluate how microfinance gives an impact on developing countries.
To analyze how much developing countries got affected by the negative impacts of microfinance.
To evaluate the remedies that will help the developing countries from microfinance.
Figure 1: Microfinance Regulation and Protection
Problem or Issues
Depending on the aspects of microfinance there can be many problems that will harm the country's development. Apart from this, there are some positive sights of microfinance. These negative factors can harm the positive viewpoint of microfinance (Chikwira et al. 2022). This problem can be formed in this research on the negative impacts of microfinance on developing countries. In the case of microfinance, to eradicate the poverty of individuals, saving and investments need to be accessed by them. This is one of the paths for fighting poverty in the areas that are rural. This microfinance affected mostly the places where poor people live. This is another big problem of microfinance.
Significance of the Research
The importance of microfinance brings the topic of the negative impacts of microfinance on developing countries. Depending on the importance of microfinance this research has bounded with the significance that is discussed in this section and will be evaluated briefly in the dissertation (Ofori and Kashiwagi, 2022). Microfinance is one of the most important tools for poverty alleviation, economic growth, and development in emerging markets, where nearly half the population lives on less than $2.50 per day. The world's major powers, which face challenges related to growth, will reap the same benefits from credit. The global financial crisis has affected microfinance as well. Credits, on the other hand, are aware that they assist low-income groups in starting and expanding small businesses that generate revenue and employment for the benefit of their communities and economies. Current and potential owners of small businesses can get small loans from microfinance lenders. People who don't have credit or access to traditional financing can use these loans to boost their income and create new jobs in their communities.
Depending on the lender, microfinance loans range from $25 to $2,000. Also, there are some problems that are faced by microfinance that will bring more importance to this research. One of the biggest contributions microfinance makes to local communities is by giving low-income and underprivileged families the tools they need to achieve financial stability (Muriu, 2020). People have the chance to earn enough money to spend on essentials like food, housing, and essential medical care thanks to small microloans. Providing these individuals the chance for long-term economic stabilization can aid in lowering the amount of individuals utilizing public assistance programs, which is advantageous to local and global businesses. Depending on the importance of microfinance this research also contained some significance. These above-mentioned aspects are the significance of this topic of research.
Literature Review
According to Ali, 2019, Microfinance, according to some academics, may encourage breeding rather than combat poverty, social inequality, and poverty. This is primarily because group lending models have inherent characteristics that necessitate peer monitoring. To put it another way, each group member is responsible for ensuring that all of the peers are able to pay their fair share in order to reduce the likelihood of future credit withdrawals (Ali and Ghoneim, 2019). As a result, wealthy borrowers are more likely to choose peers in the group with similar low-risk profiles to repay loans. In the end, this makes it more likely that people will be extremely poor and excluded from society.
Figure 2: Microfinance Elements
Because it makes it harder for poor people to get an adequate education, income inequality has a negative impact on human capital as well as labor productivity. Inequality in income also prevents the poorest people from benefiting from economic expansion (Shapiro, 2021). Misusing issues of education, employment, and poverty to elevate the poor in comparison to the wealthy class and narrow the gap between them, microfinance indirectly affects income inequality. Additionally, show how microfinance has benefited members' employment statistics. The decision was made to encourage credit-enabled individuals to promote micro businesses. In the end, it contributed to the expansion of small enterprises and improved Latvia's prosperity by ending the pattern of jobless and destitution. The establishment of microloans had significantly impacted low-income people in terms of receiving, conserving, and reducing suffering by helping them to develop their unofficial micro-enterprises, claims this research on the economic benefits of launching a modern microfinance organization in Mexico. Experts examined how microfinance impacts significant issues.
Researchers suggested that microfinance posed a significant challenge to the economy's ability to sustain socio-economic growth. Two arguments support this: First, economies of scale are overlooked by microfinance. Slashed expenses by increasing investment and production. Second, microfinance ignores the “fallacy of composition” by assuming that thousands of microenterprises with similar or quasi-similar operations created it (Dang et al. 2022). This improves macroeconomic development in the same way that each microenterprise improves individual microentrepreneurs' well-being. Consequently, the local economy may become unindustrialized if there is no synergy between the numerous small businesses that populate the market. No increase in productivity is anticipated [Referred to Appendix 2].
Additionally, it contributed to the expansion of existing micro-corporations' businesses and earnings (Awawory, 2020). Cite the fact that micro-marketers benefit greatly from microfinance for even modest capital expenditures considerably improves their firms and raises revenues since they receive a greater rate of interest on assets as proof that profitability has increased. Research from China regularly demonstrates a considerable rise in the property holding of microcredit households when microfinance facilities are made available in an underdeveloped Chinese area. Given the data discussed above, one may claim that the rising forward surge for earnings that microfinance provides for the majority's lowest deciles can promote the acceptability of profit disparity.
Research Design
This study adopts a methodology which is consistent with other research examining the connection between economic factors including financial growth, unemployment, earning disparity, and microfinance. Inequality discovered gaps in the direct examination of the impact of income after reviewing the literature on the subject (Sohn and Ume, 2019). A quantitative measure of income inequality such as the Gini coefficient. The majority of current research focuses on other aspects, like reducing poverty. Income inequality can be affected by an increase in savings, education, employment, and per capita income. There are gaps, especially when looking at how microfinance affects income inequality in developing countries. This issue requires additional research and is rarely discussed. As a result, the specific hypotheses examined in this work are: In developing nations, “microfinance has a negative effect” on reducing inequality of income.
Figure 3: Microfinance Customer Experience
The Gini index is thought to be impacted negatively by microfinance. This entails, more money will be required as microfinance becomes more prevalent (El Hadidi, 2020). Include the lowest income brackets to reduce income inequality. Inflation the Gini coefficient is expected to be positively correlated with interest rates because they decrease the purchasing power of a population's income. In addition, secondary education rates are negatively impacted by male capital. Opportunities for employment and financial inclusion increase with higher education. The effect that the start of trading will have is not entirely clear. The research that has been done on the topic of trade opening and the Gini has produced a variety of outcomes.
The growth of this relationship may be one possible explanation for its prevalence in high-income groups. More people will benefit from the income generated in this sector. Specifically, the gap between the wealthy and the poor will narrow as per capita income falls. Additionally, it is a nation with a high rate of population growth more attention to the issue of income inequality and, as a result, adopting gender-sensitive policies that assist in lowering the Gini coefficient (Kavindja, 2019). Alternatively, this connection could simply imply increased population growth. An increase in population and supply of labor will result in an increase in national production, income, and per capita income, which will reduce income inequality.
A wider client base is also being accommodated by restructuring the loan process and encouraging nations to undertake group borrowing (Hassan and Islam, 2019). The group borrowing concept has several disadvantages, one of the lenders who are generally like to repay their repayments is more inclined to select teammates that are similarly more inclined to repay their mortgages thus individuals don't miss out on potential financing; this might exclude extra low-income people. As a result, this paradigm may encourage economic isolation of the expanded wealth disparity. [Referred to Appendix 3].
Research Plan
Figure 4: Research Plan
Conclusion
Positives aside, the negatives of microfinance outweigh the positives. In developing countries, the impact of microfinance is growing negatively. In this study, the negative impacts of microfinance are provided with the help of an appropriate discussion. Most developing countries are affected by this negative behavior of microfinance. A proper understanding of this topic by providing informed results on this topic is the main purpose of this study. This research application will be made after appropriate discussion according to the goals to be achieved in the thesis. This research proposal will help to easily understand the important aspects of the topic that will be deepened in the discussion.
After discussing the sections that are important for this research it can be concluded that was mentioned, microfinance is a negatively used tool for economic development that has garnered a lot of problems. Also, this can give support to small businesses depending on the conditions of microfinance. Access to unsecured microloans, which enable marginalized members of society to start small businesses and end their extreme poverty, was made possible as a result.
References
Journals
Abera, N. and Asfaw, M., 2019. Impact of Microfinance on Rural Household Poverty in Ethiopia: A Review. Journal of Ecology & Natural Resources, 3(5), pp.2578-4994.
Abrar, A., Hasan, I. and Kabir, R., 2021. Finance-growth nexus and banking efficiency: The impact of microfinance institutions. Journal of Economics and Business, 114, p.105975.
Ali, I.A.M. and Ghoneim, H., 2019. The effect of microfinance on income inequality: Perspective of developing countries. Journal of Economics and Management, 35(1), pp.40-62.
Awaworyi Churchill, S., 2020. Impact of Microfinance on Poverty and Microenterprises. In Moving from the Millennium to the Sustainable Development Goals (pp. 295-341). Palgrave Macmillan, Singapore.
Chikwira, C., Vengesai, E. and Mandude, P., 2022. The impact of microfinance institutions on poverty alleviation. Journal of Risk and Financial Management, 15(9), p.393.
Dang, T.T., Nguyen, H.T. and Tran, N.D., 2022. Impact of Microfinance Institutions’ Lending Interest Rate on Their Financial Performance in Vietnam: A Bayesian Approach. In International Econometric Conference of Vietnam (pp. 359-374). Springer, Cham.
El Hadidi, H., 2020. The impact of microfinance on poverty reduction in Egypt: an empirical study. ?????? ??????? ???????, 40(2), pp.303-310.
Hassan, S.M. and Islam, M.M., 2019. The socio-economic impact of microfinance on the poor family: A study from Bangladesh. Journal of Asian and African Studies, 54(1), pp.3-19.
Kavindja, A., 2019. Impact of Microfinance Grants on Rural Development: A case study of Kavango East Regional Council (Master's thesis, Faculty of Commerce).
Kumari, J.P., Azam, S.F. and Khalidah, S., 2019. The effect of microfinance services on poverty reduction: Analysis of empirical evidence in Sri Lankan perspectives. European Journal of Economic and Financial Research.
Muriu, P.W., 2020. The Impact of Microfinance Programs: A Review of Data and Methodological Dilemma. Journal of Economics and Sustainable Development, 11(22), pp.100-109.
Ofori, E. and Kashiwagi, K., 2022. Impact of Microfinance on the Social Performance of Local Households: Evidence from the Kassena Nankana East District of Ghana. Sustainability, 14(10), p.6002.
Shapiro, D., 2021. Evaluating Casual Impact of Microfinance: Challenges and Results. ????, 60.
Sohn, W. and Ume, L., 2019. Impact of microfinance on poverty alleviation: a global analysis. Journal of Economics and Development Studies, 7(2), pp.82-102.
