ABSTRACT

Microfinance has been identified as a powerful tool for reducing poverty in the developing countries after won the noble prize for Grameen microcredit program. With the rapidly spared of microfinance in the world, the researcher also paid attention to microfinance related studies. There are positive and negative impacts of microfinance on alleviating poverty in the world and Cameroon in particular. This article presents the review of empirical studies that have conducted to identify the impacts of microfinance services on poverty reduction in the world. The study revealed that majority of existing studies recognized the positive relationship between microfinance and poverty reduction and most of these studies summarized outcomes that Microfinance’s potentials in reducing poverty. Few of them were realized that there were mixed effects of microfinance on poverty reduction. Furthermore, the wealth of empirical evidence available to investigate the relationship between microfinance services on poverty reduction while few studied had identified impacts of all the elements of microfinance on poverty reduction.From my findings, it is seen that microfinance services have a positive impact in the alleviation of poverty especially as the member’s benefits from credit facilities, saving facilities. Also, there are increases in the income and living standards of the beneficiaries as testified by most of the respondents. Finally the study poses some measures which could be used by microfinances to increase their role in poverty reduction. Such measures are to include the poor in decision.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Microfinance exists in order to provide financial services to society in the most convenient way, like the formal Financial Institutions like banks. It provides credit as well as deposits, savings, insurance to its clients. Poverty is a condition in which a person of a community is deprived of the basic essentials and necessities for a minimum standard of living (Yunus, 2003). Microfinance helps low-income households to stabilize their income flows and save for future needs. In good times, microfinance helps families and small businesses to prosper and at times of crisis it can help them cope and rebuild. Poverty reduction is a process which seeks to reduce economic and non-economic poverty levels in groups of people, communities or countries. Poverty reduction strategies may include programs in education, health, entrepreneurship, technology, income redistribution and various forms of economic development ( IGI Global).

Microfinance can be a critical element of an effective poverty reduction strategy. Improved access and efficient provision of savings, credit, and insurance facilities, in particular, can enable the poor to smooth their consumption patterns, manage their risks better, gradually build their assets based, develop their micro-enterprises, enhance their income earning capacity, and enjoy an improved quality of life. The objective of microfinance is to provide services to help entrepreneurs in impoverished nations to act on their ideas and obtain the financial tools available to do so and to eventually become self-sustainable.

Microfinance institutions (MFIs) have been identified as one of the influential development efforts towards promoting financial sustainability for poor individuals in society (Lindvert, 2006). The microfinance revolution has changed attitudes towards helping the poor in many countries and in some has provided a substantial flow of finance, often to very low-income groups or households, who would normally be excluded by conventional financial institutions (Kurmanalievaet al, 2003).Widespread poverty, with all the problems that come with it, is the greatest challenge of our time. One of the identified constraints facing the poor is lack of access to formal sector funds to enable them to take advantage of economic opportunities to increase their output, thereby moving out of Poverty (Sumner, 2007). Traditional aid has not helped in solving this problem (Meehan, 1999)

Microfinance has proven to be an effective and powerful tool for poverty reduction (Morduch and Haley, 2001). As a result, in recent years, microfinance has been considered as an integral component of poverty reduction strategy by many governments, international organizations and donors. Improved access and efficient provision of savings, credit, and insurance facilities, in particular, can enable the poor to smooth their consumption, manage their risks better, gradually build their asset base, develop their micro-enterprises, enhance their income earning capacity, and enjoy an improved quality of life. Like many other development tools, however, microfinance has insufficiently penetrated the poorer strata of the society.

The poorest still form the vast majority of those without access to primary health care and basic education; similarly, they are the majority of those without access to microfinance (Irobi, 2008).It is often argued that the financial sector in low-income countries has failed to serve the poor. With respect to the formal sector, banks and other financial institutions generally require significant collateral, have a preference for high income and high loan clients, and have lengthy and bureaucratic application procedures. With respect to the informal sector, money-lenders usually charge excessively high-interest rates, tend to undervalue collateral, and often allow racist and/or sexist attitudes to guide lending decisions. The failure of the formal and informal financial sectors to provide affordable credit to the poor is often viewed as one of the main factors that reinforce the vicious circle of economic, social and demographic structures that ultimately cause poverty. It is imperative to understand the ways in which finance contributes to economic growth and poverty reduction.

This provision of funds in the form of credit and microloans empowers the poor to engage in productive economic activities which can help boost their income level and thus alleviate poverty in the economy. Microfinance institutions (MFIs) are important, particularly in developing countries, because they expand the frontier of financial intermediation by providing loans to those traditionally excluded from the formal financial markets (Caudill, Gropper, &Hartarska, 2012). Microfinance is an effort to improve access to loans and to savings services for poor people. It is currently being promoted as a key development strategy for promoting poverty reduction and economic empowerment. It has the potential to effectively address material poverty, the physical deprivation of goods and services and the income to attain them by granting financial services to households who are not served by the formal banking sector.

The advent of microfinance has culminated in the flourishing of MFIs in the North West region in particular and in Cameroon in general. The introduction of MFI in Cameroon is seen as the best alternative source of financial services for low-income earners as a means to raise their income, hence reducing their poverty level and contributing to the country’s economy (Kessy&Urio, 2006). MFIs are useful as they reduce poverty through increased income and standards of living, empower women, develop the business sector through growth potentials, and develop a parallel financial sector. Since the government has so many functions to perform so as to ensure that the economy grows well then the establishment and the growth of MFIs in Cameroon has been a better method to reach poor individuals who were not easy to be reached hence providing them with an opportunity of improving their living standard. Also, over-emphasis on financial sustainability over social objectives and a failure of many MFIs to work with the poorest in the society has been seen as other challenges toward accomplishing the purposes of MFIs on poverty reduction.

1.2 Problem of Statement

Poverty reduction has been a major concern for succeeding governments in the world because it is believed to be the universally accepted way of archiving economic growth in the country. Efforts in fighting poverty in Cameroon can be traced from dependence. Mostly the poor person in the rural areas is not reflected in the microeconomic interventions and because of this, poverty is growing rapidly. Challenged with this problem, governmental organizations have and are still looking for better ways to reduce the high level of poverty, especially in Africa. Focusing on Cameroon, the government of Cameroon on their part has used several strategies such as promoting a stable macro-economic framework, strengthening growth by diversifying the economy, and promoting the growth of microfinance institutions. Evidently enough, microfinance institutions have been a tool for fighting several economic challenges, poverty inclusive, however, little research work has been done to actually determine the effect of microfinance institutions in poverty reduction in Cameroon, therefore the reason for the research.

The economic crisis in Cameroon in the mid-1980s, this is a situation where the economic performance of society is declining as measured by falling GDP growth, falling export earnings, investment, accumulation of debts increasing unemployment and poor living condition. In the 1986 to 1987 financial year, the economy contracted considerably 2.8%, and -8.6 in 1988.This decline was persistent and in fact, aggravated until 1994. This motivated the researcher to carry out research and see where the country will be in the years ahead in terms of investment. Considering the great role that MFIs play in the reduction of poverty, research on it cannot be ignored if Cameroon is becoming industrialized by the year 2035.Previous studies have been conducted in urban areas. According to statistics provided by the formal Planning National Development and Vision 2035, the Poverty Level in Cameroon is estimated at 64.1% above the national average of 45.9% placing the country among the poorest countries. This calls for research to be conducted in Cameroon to know the poverty level and where the country will be before 2030.It is for this reason that the researcher conducted research on the effects of microfinance services on poverty reduction in the North West Region of Cameroon, in consideration of the main microfinance services, namely microcredit, saving, training, and micro-insurance.

1.3 Research Questions

The study will seek to answer the following question: what is the effect of microfinance on poverty reduction in Cameroon?

To answer this question, answers will be sought to the following specific research questions:

• What are the effects of microcredit on poverty reduction?
• What are the effects of micro saving on poverty reduction?
• What is the effects of micro insurance on poverty reduction?

1.4 Objective of the study

The main objective of this study is to access the contribution of microfinance to poverty reduction in Cameroon.

This study will further be guided by the following specific objectives:

• To assess the effect of microcredit on poverty reduction in Cameroon.
• To assess the effect of micro saving on poverty reduction in Cameroon.
• To assess the effect of micro insurance on poverty reduction in Cameroon.