The study presents the microfinance sector, by analyzing the general context in which this type of economic activity has appeared and developed since early age. While microfinance clients have certain profiles, sector’s products are diverse. Moreover, Microfinance Institutions are different from classic bank structures, they have specific juridical background, often launching as non-profit organizations and they have developed in time complex assistance services. In Romania, non-financial institutions have mostly implemented a commercial strategy that guarantees a higher capitalization of invested funds. Still, Institutions have difficulties in adapting to market evolution; therefore some of them prefer becoming banking institutions instead. Nevertheless, present socialeconomic context points up the high demand and necessity of this type of services.microfinance, international organizations, poverty, international economy

Bachelor Marinescu Ana - Maria

English

Research Papers in Economics

 
  65 
Management – Marketing - Tourism 
MICROFINANCE– A WAY TO CONFORNT POVERTY  AND STIMULATE ENTREPRENEURSHIP 
WORLDWIDE
Bachelor Marinescu Ana - Maria 
University “Ovidius” 
Faculty of Economical Sciences 
Constanta, Romania 
Abstract: The study presents the microfinance sector, by analyzing the 
general context in which this type of economic activity has appeared and 
developed since early age. While microfinance clients have certain 
profiles, sector’s products are diverse. Moreover, Microfinance Institutions 
are different from classic bank structures, they have specific juridical 
background, often launching as non-profit organizations and they have 
developed in time complex assistance services. In Romania, non-financial 
institutions have mostly implemented a commercial strategy that 
guarantees a higher capitalization of invested funds. Still, Institutions have 
difficulties in adapting to market evolution; therefore some of them prefer 
becoming banking institutions instead. Nevertheless, present social-
economic context points up the high demand and necessity of this type of 
services. 
JEL classification: G21, F36  
Key words: microfinance, international organizations, poverty, international 
economy          
  1. Introduction  
Microfinance is a worldwide recognized effective instrument to fight poverty, 
financial and social exclusion. In Europe, the development of this sector has begun in 
the ninety’s and it has progressed differently form one country to another. A rapid and 
sustainable growth in the Central and Eastern European countries (including some of 
the new E.U. member countries) has contrasted with the slower enhancement of this 
sector in the Western European countries. Diverse networks, such as Microfinance 
Centre (MFC), European Microfinance Network (EMN) and Community Development 
Finance Association (CDFA) were involved in the efforts to create and stimulate 
positive experiences, adapted to the specific of each country and to the modalities in 
which every one operates. A reduced know-how transfer was registered between 
members of these international or regional networks.  
 Micro credit, the main instrument of Microfinance institutions, was introduced 
in the eighties, although these sorts of “need financing” experiments existed even 30 
years earlier, in countries like Bangladesh, Brazil and other several states. What mostly 
differentiated micro credit than the classic financial credit was the effort to avoid flaws 
of early generation development programmes, by insisting upon the reimbursement of 
all small credits and by calculating interests and commissions for each provided service, 
in order to cover the total costs of activity. Furthermore, the programs pursuit the  
  66 
Revista Tinerilor Economi ti (The Young Economists Journal) 
concentration of efforts upon client groups that had as alternative credit source the 
informal sector. The interest has passed in time from the subsidy loan type programmes 
to programs investing in the sustainable growth of local institutions that may serve the 
interests of people and small business lacking financial resources. Generally speaking, 
micro credit was been an initiative of the non-profit, private sector, avoiding to reach a 
political character. This approach has permitted the microfinance sector to register 
higher performances, in the past 20 years, and also it enhanced the identification and 
development of new necessary financial services, provided by this type of institutions.    
            Poverty has multiple dimensions. Facilitating the access to financial services, 
both for individual persons end enterprises, Microfinance sector plays an important role 
in the eradication of these numerous aspects of poverty. For instance, revenue 
generating process of a certain business must encourage the general, qualitative and 
quantitative, development of products and services, but it also affect income sources to 
became more stable, it enhances food security, children education and so on. Moreover, 
as women are often excluded from the public space, the interaction and transactions 
with formal institutions and authorities contribute to the increase of self-trust and ability 
to involve in a certain remunerative small business. Therefore, we can conclude that 
Microfinance exercises a strong influence upon the entrepreneurial sprit and economic 
initiative, regardless discrimination of any type. 
            Recent studies show the intense measure in which individuals from the excluded 
categories are more vulnerable to external shocks than the others, such as diseases, 
violent climate phenomenon, robberies or other similar events. These type of shocks 
might induce sever lack of basic resources, also financial resources, already being 
limited. In the absence of efficient and properly implemented financial services, these 
people find themselves going deeper into poverty. The recovery and repositioning on 
the anterior financial stability level might take several years time, even more than 10.     
           The typical microfinance clients are those persons having small incomes that 
usually do not hold the access to formal banking institutions products. These 
individuals are usually unofficially employed, working on their own, some of them 
working for their personal small businesses. In rural areas, they own small farms or 
households, or they are people involved in certain small scale revenue generating 
activities, such as cattle commerce, wood industry etc. In urban areas, on the other 
hand, the diverse microfinance services reach up to different type of individuals 
depending on their occupation, and they include small shops owners, services 
providers, handicraftsmen, street vendors and others. Therefore, microfinance clients 
will always be poor and less poor, bur certainly vulnerable people, demonstrating a 
relative stability of income sources.        
  While new financial services of the Microfinance sector are introduced on the 
market and are being developed, the potential market for this type of clients interested 
in the programs is also expanding. For instance, micro credit alone has a limited market 
to address to, nevertheless one complex financial services portfolio, which may include 
different type of deposits, payment services or insurance, is more likely to satisfy a 
higher demand. Many impecunious people, coming from the rural regions, frequently 
prefer opening small bank deposits, for money that otherwise would be squandered in 
several months, to satisfy daily necessities, than borrowing significant sums of money 
that they might not be capable to refund. 
 
  
  67 
Management – Marketing - Tourism 
2. Specific Products of Microfinancing 
Government institutions and support agencies often try to make use of 
microfinances as a device to compensate for other social problems in a country, such as 
drought, floods, refugees’ reestablishment, civil wars victims, unemployment, devalued 
level of professional education and so on. Because the micro credit has been promoted 
as a device of reducing poverty, one expects this one to be the solution for those who 
have become poor as consequence of the already mentioned circumstances. The Micro 
credit programs rarely function in these situations. A credit needs a 98% performance 
rate in order to be effective. This means that 98% of those who have graduated the 
professional training courses or 98% of the refugees that have returned to their country 
should set up some successful micro enterprises, solvent, so that their micro credit paid 
installments be high enough to allow the general sustainability of such a microfinance 
program. But this thing is practically illusory. Running a program, in which 
installments are not paid or have a lower value than the credit itself, acts contrary to the 
notion of credit and dissolves the practice of repayment among those who can afford it. 
For this very reason, the Micro credit represents a viable solution for those who 
have already identified some economic opportunities which they can transform into 
capital if they are provided small amounts of money. So, those persons who work in 
stable and progressive economic systems, those who have proved abilities to organize 
different activities proposed within the enterprise and who, at the same time, have taken 
upon themselves the engagement of debts repayment (without having the feeling that 
the respective credit is some kind of social aid) are the best candidates for the Micro 
crediting programs. 
The supply of financial services to the poor is a practice rather expensive, 
especially if one relates to the level of implied transactions. This is one of the main 
reasons for which banks do not loan small amounts of money. For instance, a loan of 
100 dollars requires the same number of employees and resources as one of 2000 
dollars, the costs per transaction unit consequently raising. Credit officers have to pay 
visits to clients at their residence or work place, to evaluate their repayment capacity on 
the basis of some interviews with their families or acquaintances, and in many cases, 
the credit officers continue this procedure in order to stress on the importance of a 
blooming repayment culture. So, the costs of a 100 dollars micro credit may raise up to 
25 dollars. This being 25% of the loan value, the institution finds itself thus obliged to 
apply an increased rate of interest as to meet the administrative costs. 
3. Microfinancing Institutions 
Microfinancing institutions are organizations that provide financial services to 
those categories of persons with lower incomes. A large part of these organizations 
offer micro credits and take in exchange small amounts of money from their clients. 
Within the microfinancing industry, the term Microfinancing Institution refers now to a 
wide variety of organizations that control the supply of these services: NGOs, Credit 
Unions, cooperative societies, private commercial banks and non-banking financial 
institutions (some that have evolved from NGOs into systematized institutions), as well 
as banks with government capital or with private capital, independently administrated. 
The common image that people visualize by referring to a microfinancing 
institution is that of a `financial NGO`, a NGO that dedicates itself thoroughly and 
totally to supply the financial services: but, most of the time, NGOs are not allowed to 
create deposits of savings coming from the general public. This group of organizations  
  68 
Revista Tinerilor Economi ti (The Young Economists Journal) 
has led to the development of micro credits and hence to microfinances, globally 
speaking. The organizations in discussion encompass the newest crediting methods in 
order to generate efficiency and also access to the more under-developed spheres of 
economy, on sustainable bases. 
As far as the profitability of these organizations is concerned, statistical data of  
the MicroBanking report, from 2005, point out that the first 63 Microfinancing 
Institutions of the world, have an average of the profitability rate, after having adjusting 
them according to inflation and having also considered the subvention programs that 
they would have received, of 2.5% of the total income. This rate may be compared as 
standard with those from the sphere of commercial banks and besides, it renders 
credible the hypothesis that microfinances can be sufficiently attractive as to be 
implemented in the retail banking field, thus increasing also the number of clients that 
can benefit from these programs. On the other hand, some parts are worried that a too 
heavy interest in obtaining profit in microfinances may lead to a reorientation towards 
categories of clients who have greater capacities of absorbing larger amounts of money. 
This is called the `crowding out` effect. This may happen in the circumstances in which 
there is a considerable number of people with mean incomes who do not have access to 
the services provided by the banking system or other crediting societies. 
As the microfinance programs have extended as number, seeping in more and 
more regions of the world, institutions have become thus interested in offering a legal 
framework that would allow the development of their practices. This fact allowed 
further the advancement of some alternative types of financial NGOs, credit unions and 
other institutions that would be able to obtain licenses in order to provide specialized 
financial services. This may represent an adequate strategy in some countries, but in the 
majority of them, their general progress level of the microfinance industry cannot yet 
grant the licensing of a special class of institutions exclusively meant to the category of 
persons with low incomes. A disadvantage would be that of the high costs implicated 
by a correct supervision of this new segment, costs that may even rise up to 25% - 50% 
of an agency’s total budget considering that the final incomes to be produced would be 
only a small part from the whole financial system. 
4. Romania and Its Microfinance sector 
As far as Romania is concerned, it can be mentioned that Microfinances set out 
14 years ago in this space, when the first international institution within the 
Microfinances field initiated a program for financing the expansion projects of the 
Romanian SMEs. In the last years, this one has become more and more efficient and 
productive, achieving a more and more significant role in providing the necessary 
support and services to enterprisers. Regarding the legislative circumstances, one may 
affirm that the authorities really uphold this program in promoting a proper framework 
to be favorable to the development of activities; furthermore, EU stimulates the 
initiatives of developing this field. Hence, though micro credits put forward various 
forms and accomplish different roles, in the EU member states and regions, they are 
frequently used as devices as to encourage the expansion of independent activities, as 
well as the foundation and the development of micro enterprises. 
In Romania, the majority of the microfinancing institutions have adopted a 
strategy with a strong commercial character, this one producing also the best profits. In 
the same time, this strategy has led to the extension of the access to services, 
geographically speaking, and to the growth of efficiency and productivity of the  
  69 
Management – Marketing - Tourism 
specific activities. But unfortunately, this strong commercial character, which is 
reflected in its attitude towards the market, disadvantages all those organizations that 
pioneer especially the social support. Besides, it may be observed that the majority of 
initiatives and almost all the activities, which are made public or promoted, relate 
mostly to enterprises and less to the general public and to the different social classes 
whose claims for financial services are consequently unsatisfied. The structure of 
national microfinancing field is displayed in the diagram no.1 (2006 data). 
Only in Romania, it is estimated that a quarter of the total population is poor, and 
8,6% of this percentage finds itself at the level of extreme poverty. That is, a person 
who cannot afford his or her consumption expenses at a maximum limit of 157,5 new 
Lei (1,570,000 old Lei) is considered to be a  poor person, and if this limit is under 100 
new Lei (one million old Lei) one may assert that the respective person lives in an 
extreme poverty. This category of persons lives under the standards of a decent life and 
does not dispose of the mere financing -  crediting services or access to consumption 
loans and capitalization of the cumulative enterprising potential. Although, throughout 
the country, there is a series of non-banking financial organizations and institutions 
referential of the European and global economy, existing at least one institution per 
county, the number of clients, either physical or juridical, which appeals to 
microfinancing services, is still very reduced. 
 
Figure no. 1. 
 
 As for the business sector, and the micro enterprises, which represent 99% of the entire 
EU’s campaigns, one may be notice, given the present circumstances of the global 
liquidities crisis, a critical demand of the specialized services meant to this sector. 
Microfinances may represent a solution for the member states’ economies, if one 
0
3
6
9
1
2
1
5
1
8
Social
oriented
Social and commercial 
oriented 
Commercial 
oriented
NG
O  NB
FI
 GLP   EUR
5,000,000
EUR 5,000,000 >
GLP  
  EUR 1,000,000  GLP 
<
EUR 
1,000,000  
Age 
_MATURITY 
SOCIAL 
ORIENTATION  
  70 
Revista Tinerilor Economi ti (The Young Economists Journal) 
considers that the microfinancing consultancy also stands for, apart from establishing 
the value of a financial support, providing training services, human resources 
recruitment, assistance in negotiations or studies and researches that significantly 
contribute by adding a high value, considering the ineffectual managerial capacities as 
the main impediments to a durable business. 
As a conclusion, the present paper sustains the importance of the microfinancing 
sector, not only in Romania, but also in the world, this sector being a device of fighting 
against poverty proliferated throughout various global regions. If we are to take into 
consideration the statistical data referring to the apportionment of wealthiness in the 
world, statistics which reveal that only 1% of the global population possess 99% of 
available resources and that 40% - 50% of GIP, generated nowadays in economy, is 
produced by small and medium  enterprises, with maximum 250 employees, it seems 
naturally to conclude that the banking financial sector represents a market recess 
extremely well valued, but which does not suppose the access to the public market 
because of the high risks typically implied by this one. Maybe it’s the time for a 
revolution in this services sector, which for more than 100 years, has been serving the 
interests of the greatest world powers and of their corporations, neglecting thus the 
needs of masses. 
REFERENCES 
1.  Montgomery, 
H, Weiss, J. 
 
Great Expectations: Microfinance and Poverty Reduction in 
Asia and Latin America, Report of ADB Institute, February 
2006 
2.  Gwinner, W. 
B., Goldberg, 
M. 
 
From Financial Exclusion to Inclusion, Increasing the 
vailability of credit to the urban poor in Latin America, 
Enbreve Publication, no. 98, November 2006 
3.  Reynold, O. 
Walter, P. 
Best Practices for National and Regional Microfinance 
Networks - The Experience of Latin America and the 
Caribbean -Guatemala, Central America, Microcredit 
Summit Campaign, September 2006 
4.  Jung, M.  Microfinance with a Mission: Learning Together, Budapest, 
Ungary, International Conference, 7-9 June, 2006 
 
5.  World Bank 
official report 
Romania at a glance, World Bank, 11 September 2003, 
http://www.worldbank.org/ 
6.  -  Report no. 26169 – Romania Poverty Assessment, Volume 
One: main report and Volume Two, September 2003 
 
7.  Perrett, G.  Report on the current state of microfinance in Romania and 
proposed work plan, Shorebank Advisory Services, 28 May 
2003 
8.  Shinn,  S.  Making a  Major Impact with Microfinance, Biz Ed 
Publication, London, mai 2007 issue 
9.  -  Benchmarking Microfinance in Romania 2005 – 2006, A 
report from Technical Assistance to Develop the SMEs 
Sector in Romania Project  
  71 
Management – Marketing - Tourism 
10. -  Women's Entrepreneurship in Romania: first results and 
policy Orientations, 9 th CEI Summit Economic Forum, 
Tirana, 22-23 November 2006 
 

26169 – Romania Poverty Assessment, Volume One: main report and Volume Two,

Entrepreneurship in Romania: first results and policy

Expectations: Microfinance and Poverty Reduction in Asia and Latin America,

From Financial Exclusion to Inclusion, Increasing the vailability of credit to the urban poor

Making a Major Impact with Microfinance, Biz Ed Publication,

Microfinance in Romania

Microfinance with a Mission: Learning Together,

official report Romania at a glance,

Practices for National and Regional Microfinance Networks - The Experience of Latin America and the Caribbean -Guatemala,

Report on the current state of microfinance in Romania and proposed work plan, Shorebank Advisory Services,

MICROFINANCE– A WAY TO CONFORNT POVERTY AND STIMULATE ENTREPRENEURSHIP WORLDWIDE

MICROFINANCE– A WAY TO CONFORNT POVERTY AND STIMULATE ENTREPRENEURSHIP WORLDWIDE

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics