Microfinance and Rural Entrepreneurship the Objective of Essay

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  • Subject: Economics
  • Type: Essay
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Excerpt from Essay :

Microfinance and Rural Entrepreneurship

The objective of this study is to conduct an analysis of the field of entrepreneurial finance and to describe important issues or current dilemmas in the field. Toward this end, this study will conduct an extensive review of literature in this area of inquiry.

The difference between rural and urban entrepreneurship is reported in the work of Ahirrao and Chaugule (2010) to be "only a matter of degree rather than the content." (p.1) Ahirrao and Chaugule state that "It is essential to have a balanced regional development of the country and to avoid the concentration of industry in one place. Rural areas must try for better utilization of human resources to improve the rural economy." (2010, p.1) The industrial unit in rural areas or rural industries include such as "handlooms, handicrafts, sericulture, agro-based units, service industries, rural workshops, metal-based industries, dairy and related activities" as well as others. (Ahirrao and Chaugule, 2010, p.1) Whether the venture falls within the definition of rural industries is dependent upon "the scale of operation, the level of technology, the types of raw materials to be used and the size of investment." (Ahirrao and Chaugule, 2010, p.1) Rural industries, services, and enterprises "constitute the non-farm sector." (Ahirrao and Chaugule, 2010, p.1) The stated strategy that is appropriate for building rural industries in developing countries is one of expansion of products and services in order to diversity the rural economy and assist in the further development of agriculture resulting in "inputs to agriculture as well as process large varieties of agricultural produce." (Ahirrao and Chaugule, 2010, p.1) Rural industries in addition, provides "new opportunities for gainful employment, particularly to the under-employed during lean periods, when there are no agricultural operations." (Ahirrao and Chaugule, 2010, p.1)

I. Plight of the Rural Poor

Microfinance is reported to be "changing the lives of the rural people, re-energizing the poor community, particularly the most oppressed, suppressed and neglected community of the rural society." (Ahirrao and Chaugule, 2010, p.1) It is stated that expansion of credit access in addition to the extension of other financial products and services to rural individuals of the low-income group below the poverty line is inclusive of "women, small marginal farmers, artisans, tenant's agricultural laborers, and share croppers." (Ahirrao and Chaugule, 2010, p.1) Ahirrao and Chaugule state that the rural poor are "the most disadvantaged of access to credit through formal sources. Lack of access to the credit has always been a major hindrance in promoting micro-enterprises." (Ahirrao and Chaugule, 2010, p.1) The primary concern of rural development is "addressing the needs of the rural poor in the matter of sustainable economic activities. Alleviation of rural poverty can be achieved by identifying income-generating activities with focus on micro finance as the basic input for socio-economic development." (Ahirrao and Chaugule, 2010, p.1)

II. Micro-Finance and Micro-Credit

Micro-credit places an emphasis on "…building capacity of a micro entrepreneur, employment generation, trust building and help to the 'micro entrepreneur' at initiation and during difficult times." (Ahirrao and Chaugule, 2010, p.1) Micro-credits are such that are "enough for innovative and hard working micro entrepreneurs to start small business such as making handicraft items. From the income of these small businesses the borrowers of micro credit can enjoy better life, food, shelter, health care and education for their families and above all these small earnings will provide a hope for better future." (Ahirrao and Chaugule, 2010, p.1) Ahirrao and Chaugele (2010) report that in rural areas "…the micro entrepreneurs continue to produce the traditional designs for local markets produce a large variety of essential products such as milk, food products, village crafts and homemade snack foods. Many are engaged in retail trading of groceries and textiles. These enterprises represent a substantial supply resource for semiurban and urban markets. Micro credit is emerging as a powerful instrument for poverty alleviation in the new economy. It is a powerful instrument and has improved access of rural poor." (Ahirrao and Chaugule, 2010, p.1)

Ahirrao and Chaugule additionally report that enhancement of the rural artisan's access to credit "for consumption and production, the establishment of new and strengthening of existing micro-credit mechanisms and micro-finance institution will be undertaken so that the outreach of credit is enhanced." (Ahirrao and Chaugule, 2010, p.1) The work of Phan (2010) entitled "Entrepreneurship and Microfinance: A Review and Research Agenda" reports that it has been stated that encouragement of entrepreneurship on a small scale among the poor is a method that can be used in breaking the "poverty trap" as well as to "foster production surpluses." (p.2) Phan states that micro-credit "as the means to increased capital, is the primary input to kick-start the entrepreneurial production process." (nd, p.2) Micro-credit is reported to be a concept that is centuries old. The poverty trap persists due to a "combination of social stigma from failed attempts at entrepreneurship, institutional constraints on lending practices, and the inability to recover quickly from setbacks such as natural disasters and personal loss such as the death of a household earner." (Phan, nd, p.3) Kiiru (nd) states in the work entitled "Microfinance, Entrepreneurship and Rural Development: Empirical evidence from Makueni District, Kenya" that Although microfinance has elicited different reactions from different stakeholders, there seem to be a general agreement that it is useful in reducing poverty. However the context in which microfinance is of help to rural poor households is not well researched." (p.3) It is reported that poor households are "held up in a vicious cycle of poverty, where labor, their best resource is 'locked up as unproductive' due to different constraints including a liquidity restrain. For example, a poor household may have family members who are willing to work in the family garden to grow crops. However if they cannot afford improved crop varieties and farm inputs then the returns to their labor are not enough to ensure a good standard of living. Many governments and donor communities believe that the liquidity constraint is the most important constraint impeding poor households and that if it is addressed it will be possible for households to escape poverty. Economists argue that to break the vicious cycle of poverty, there needs to be an outside force that will intervene at some point of the cycle to improve demand for goods and services. This could be done by for example injecting some liquidity, thereby unlocking the productivity of household labor. Microfinance promises not only to break the vicious chain of poverty but also it promises to initiate a whole new cycle of virtuous spirals of self enforcing economic empowerment that lead to increased household well-being." (Kiiru, nd, p.3) The promise of microfinance is shown in the following illustration labeled Figure 1.

Figure 1 - The Promise of Microfinance

Source: Kiiru (nd)

There are reported to be at least two assumptions that go with this model and those are stated as follows:

(1) It is assumed that all poor people can become micro-entrepreneurs if only they were given a chance through credit;

(2) It is assumed that there is a vibrant market for goods and services and that it is possible for micro-entrepreneurs to get linked up to markets for their products; otherwise how else is micro financing supposed to improve incomes if there was no demand for goods and services. (Kiriiu, nd, p.4)

Phan (2010) states that according to theory the objective of micro-finance is "to enable the acquisition of technological capital to kick-start the entrepreneurial process. Government social policy could not reconcile the high interest rates associated with micro debt markets and indeed often sort to shut down those markets by enforcing usury laws. From a business standpoint, other obstacles have denied poor people access to credit, such as the lack of collateral. No standard existed to affirm how financial institutions could benefit from bearing the administrative costs and the risks of loaning to the poor. Servicing microloans or monitoring the provision of grants is economically infeasible for traditional financial institutions and government because of the costs of identifying, delivering, and monitoring micro-credit to communities who are not already part of the market economy. Financial institutions are able to, through charging market interest rates or higher than usual interest rates, to "cover their administrative costs while enjoying repayment rates significantly higher than that of the traditional commercial banks." (Phan, 2010)

III. Sustainability and Micro-Finance

The work of Noruwa and Emeka (2012) entitled "The Role and Sustainability of Microfinance Banks in Reducing Poverty and Development of Entrepreneurship in Urban and Rural Areas in Nigeria" reports that "The achievement of good economic growth is anchored around an environment of well focused policies aimed at poverty eradication through the empowerment of the people by availing them of access to factors of production, particularly credit." (p.33) Credit has been acknowledged widely as "an essential tool for entrepreneurship development." (p.33) The ability for Nigerian entrepreneurs to engage in new business is stated to be limited by a lack to access to financial institutions. (Noruwa and Emeka, 2012, paraphrased) Noruwa…

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