Microfinance for Poverty Reduction Essay

Custom Student Mr. Teacher ENG 1001-04 20 December 2016

Microfinance for Poverty Reduction


Microfinance is not something new in Malaysia. It has been operated by credit unions, co-operative banks and specialised credit windows of banks. Microfinance services of financial credit range for about RM10,000 (USD2,631) and mostly to finance small businesses, agricultural loans and loans for poverty reduction. Microfinance program in Malaysia has been implemented since 1987 as one of the poverty eradication strategies in the country. There are three large microfinance institutions in Malaysia namely AIM, YUM and TEKUN that targeted to different groups of people. Each of the microfinance institution has its own lending systems and has been subsidized by the government since their existence.

Majlis Amanah Rakyat (MARA), council of trust to the Bumiputera and Credit Guarantee Corporation (CGC) are some of the pioneers to introduce microfinance loans to its borrowers. The rural credit institutions comprising of Agriculture Bank of Malaysia (BPM), Farmers Organisation Authority (LPP), Federal Land Development Authority (FELDA), and agro-based Co-operative Societies provide micro credit for the agriculture sectors. There are a number of non-government organisations (NGOs) that engaged in microfinance. These include Yayasan Usaha Maju operating in Sabah, Koperasi Kredit Rakyat in Selangor and the best and significantly known microfinance institution (MFI) is Amanah Ikhtiar Malaysia (AIM).

Background of the study

This study research about microfinance and its strategy to reduce the poverty among Malaysia’s citizen. Microfinance was introduced in Malaysia during the last three decades. Two types of institutions namely banking institutions and non-bank institutions offer microfinance programs. Banking institutions that offer microfinance products are Public Bank, AM Bank, EONCAP Islamic Bank, CIMB Bank, Alliance Bank, United Overseas Bank, Bank Simpanan Nasional, Agro Bank and Bank Rakyat.

The issue of poverty has been a major concern to many nations, particularly the developing countries. Poverty has been defined as a situation where a population or a section of the population is able to meet only its bare subsistence, the essentials of food, clothing and shelter, in order to maintain a minimum standard of living (Balogun, 1999). Low productivity and poorly functioning markets for agricultural outputs are among the causes of poverty as indicated in the government’s poverty reduction strategy paper. Small scale farmers rely on rudimentary methods and technology and they have limited skills and inputs such as improved seeds that would increase yields. Rural poverty in Malaysia

Remarkable progress has been achieved in poverty eradication in Malaysia. In the early 1970’s almost half of households were classified as poor while in 1997 the incidence of poverty had significantly declined to 6.1% However, the crisis brought a slight upward swing at 8.1% in 1998. Efforts by the Malaysian government to counter the effects of the crisis bore positive results when the incidence of poverty was reduced to 7.5% in 1999. By 2005, the incidence of poverty was targeted to reduce further to 0.5% (Abdul Rahman Hasan and Sa’idah Hashim, 2001).

Poverty is both a social and an economic problem. Eradicating poverty from society is everyone’s dream but in reality it is still around even in economically developed countries. Governments have responsibilities to eradicate the poverty or, at least reduce poverty rates. In fact, poverty reduction is everyone’s social responsibility. This is significant because Malaysia is shifting towards an industrialized economy and starting to enjoy economic growth but there are still so many people who are under the poverty line.

Definition of terms

1. Microfinance

Microfinance is a provision of a broad range of financial services such as savings, credit, insurance and payment services to the poor or low-income group who are excluded from the normal banking sectors (Ledgerwood, 1999). While, Bank Negara Malaysia (BNM) defined microfinance as the provision of small loans/financing ranging from RM1,000 up to RM50,000 (USD16,129) to microenterprises or self-employed individuals, for their business activities. Microfinancing is meant for business financing only, such as for working capital and for capital expenditure. It is not a personal loan. Microfinance is defined as the provision of financial services to low-income clients, including consumers and the self- employed, who traditionally lack access to banking and related services (Gonzalez-Vega, 2008). Microfinance is a place for the poor and near poor clients to get access to a high quality financial service, which include not just credit but also savings, insurance and fund transfer.

However, Conroy (2002) stated that microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers, and insurance to poor and low-income households and their micro-enterprises. The term evolved from the concepts of “microcredit” and “microenterprise” financing, to include the importance of savings as well as borrowing. Although the terms are used interchangeably, microfinance represents the field as a whole, while the other two terms are more technical and refer only to credit provision (Maria, 2004).

The World Bank defines microfinance as “…. Small-scale financial services – primarily credit and savings – provided to people who farm or fish and who operate small enterprises or microenterprises where goods are produced, recycled, repaired, or sold; who provide services; who work for wages or commissions; who gain income from renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other individuals and groups at the local levels of developing countries, both rural and urban” (Robinson, 2001). Microfinance activities usually involve giving small loans to customers for working capital, group guarantees, compulsory savings, insurance and access to repeat loans for a larger amount based on repayment performance.

2. Poverty

A state or condition in which a person or community lacks the financial resources and essentials to enjoy a minimum standard of life and well-being that’s considered acceptable in society. According to Carlton G. Davis (1977), “the word poverty has assumed a multiplicity of meanings at different times and places. Moreover, the term now has different meanings for different persons even within the same academic discipline.” For Marshall (1998), poverty is “a state in which resources, usually materials but sometimes cultural, are lacking. It is common to distinguish between absolute and relative definitions of poverty. Poverty defined in absolute terms refers to a state in which the individual lacks the resources necessary for subsistence. Relative definitions, frequently favored by sociologists, refer to the individual’s or group’s lack of resources when compared with that of other members of the society…in other words their relative standard of living.” The causes of poverty are sometimes pointed to areas where business establishments are not successful and the poor depend on assistance from government and agencies.


Poverty is a harsh and undesired phenomenon in mankind. Reducing, if possible eradicating poverty is unquestionable. Thus, microfinance programs have been considered as one of the main instruments in poverty reduction in recent development agenda. It has been observed that microfinance play a major role to the socio-economic development and alleviating poverty. Rural banks and micro finance institutions were established in response to the need and the demand to make institutional credit and banking services available to small-scale farmers and rural entrepreneurs. Microfinance institutions were created to operate using local initiatives and local commitment to mobilize resources locally and to lend them to deserving customers using simplified procedures and eligibility criteria.

However, microfinance institutions are faced with lots of problems of saving mobilization, and utilization of funds. For instance there is lack of knowledge in risk management, long procedures accessing funds and others. According to David Hulme, microfinance has become an increasingly important component of strategies to reduce poverty. However, knowledge about the achievements of such initiatives remains contested. While some researchers argued that microfinance has positive economic and social impact on the poor, others warn of its negative impacts on the poor. Still others in the middle contend that microfinance indeed has a positive impact, but not on the poorest, as is so often claimed. Therefore, this research, is to analysis and see how microfinance is used as an effective poverty reduction strategy in Malaysia.


The main objective of the study is to examine the impact of microfinance in poverty reduction in Malaysia. The specific objectives are to: 1. Find out the role of microfinance in poverty alleviation or reduction. 2. To show how microfinance works, by using group lending methodology for reducing poverty 3. To find out the impact of microfinance on poverty reduction 4. To examine the challenges or barriers to credit delivery by microfinance institutions. 5. To use the services/products of microfinance with good.

Research questions

The guiding research question is ‘to what extent and in which way microfinance services of the two cases can lead to poverty reduction in Malaysia?’ Based on this guiding question, it is hoped that the study will answer the following specific questions: 1. What are the role(s) of microfinance in poverty alleviation or reduction in the country? 2. What is the effectiveness of microfinance institutions in the country? 3. What are the impacts of microfinance on poverty reduction? 4. What are the challenges faced by microfinance institutions in the country?


While interviewing the people, we have faced problems in explaining the questions as most of the people, who are involved in microfinance program, are illiterate and living in villages. Therefore, it was too difficult to make them understand some of the technical terms: like capital, income etc. Due to the non-co-operative attitude of some of the respondents, the number of people given questionnaire was smaller than the researcher had originally intended. Financial constrain also affected the effort of the researcher thereby, making it difficult for the researcher to gather the necessary data. Time constraint was also limiting factor for the researcher.


A study of this nature would make a significant contribution by assisting government and other stakeholders to find lasting solutions to problems facing micro financing in the country. The study is very significant because it will add to the existing literature or the research has added to the stock of books and works already written on microfinance in Malaysia. The study will help Micro Finance Institutions to put in place flexible policies and programs that will help SMEs to access their facilities to ensure its development and expansion.


The study consists of three chapters. The first chapter consists of the background to the study, significance of the study, definition of terms, statement of the problem, Objective of the study, research questions, and limitations of study and lastly the organization of the study. Chapter two deals with literature review of concept relevant to the study. While in chapter three, deals with the methodology adopted to conduct he research. This chapter deals with issues such as the research design, population and sample size, instrument, procedures, proposed data analysis and summary.

Free Microfinance for Poverty Reduction Essay Sample


  • Subject:

  • University/College: University of Arkansas System

  • Type of paper: Thesis/Dissertation Chapter

  • Date: 20 December 2016

  • Words:

  • Pages:

Let us write you a custom essay sample on Microfinance for Poverty Reduction

for only $16.38 $13.9/page

your testimonials