Impact of Small Loans

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Impactof Small Loans

Impactof Small Loans

Thequestion of transforming lives has attracted numerous debates in manycountries aiming at the generation of policies that will alienatepoverty or reduce poverty levels. More often than not, transforminglives, especially for people living below the poverty line orslightly above poverty line has been used as a performance indicatorof those in leadership with the leaders that improve such livelihoodsgetting more approval ratings. Therefore, improving the socialindicators is one of the core agenda in many countries globally.Micro credit has been appraised as one of the development tools usedto assist marginalized people access small loans toenable them start their own businesses or build their capacity togrow their businesses. Research however shows that, while small loanshave some added benefits, the benefits are not adequate to translateto transformed lives.

Mostof the banking institutions have introduced the small loan product toattract small business owners. However, they require collateral whichthe peasants cannot afford. The introduction of micro creditfacilities has enabled the poor to access loans since they do notrequire collateral but instead require people to be guaranteed byother members of the group who have deposits in the facility. In caseof a default, all the members in that group suffer the loss resultingto increased commitment and community support (Westover,200812). The process of obtaining loans has been simplified as it iseasier for a poor person to use such group rather than pledging acollateral as a security for the loan. Only a small percentage ofbusiness starters are able to meet the prerequisites for a bank loan,therefore, micro loan facilities come in handy to salvage the poorpeople’s financial needs.

Similarly,micro loans have increased the freedom of how people earn theirlivelihood. They do not have to be stuck to the low- wage labor sincethey can obtain small loans to start up small businesses which ifproperly managed, they grow with time (Westover,200813). Unlike the banks which give only a percentage of the appliedloans, micro credit facilities give the applicant the whole amountapplied for as long as the guarantor’s deposits can cover theamount. The applicant will not therefore be forced to go looking forthe balance. Most of the people who borrow such loans reduce theirwaged labor as the sales increases.

Finally,small loans lifted the burden where peasants and impoverished womenwould result out selling their assets or having them repossessed inevent of their inability to pay the loans. Small businesses areforced to depend on the bank loans due to the fact that they cannotaccess public institutional debt and equity capital ((Westover,200813). In addition, their retained earnings are minimal compared tolarge corporation due to the limited economies of scale. For theirbusinesses to survive, they rely on bank loans which results torepossession due to their inability to pay.

Despitethe above benefits, small loans do not transform the livelihood ofthe impoverished people. This is because they charge higher interestrate compared to other sources of capital resulting to increasedcosts to the borrower. This leads to high dependency where the poorkeeps on applying subsequent loans to cover the previous loans.

Secondly,the justification of the small loans is based on the assumption thatthe poor people prefer to own their own businesses, where the truthis, most of them are looking for reliable employment opportunities(Tripathi 2015 3). Most of them do not possess the entrepreneurialskills required to thrive such businesses. The second assumption isthat accessibility to small loans will automatically lead tosuccessful businesses. This is not normally the case since, even whenthe sales are high the expenditures are high as the peasants rely ontheir businesses for upkeep thereby consuming the major part of therevenue and need to meet the interest expense charged by the microcredit institutions (Tripathi, 2015 3).

Similarly,access to loan does not protect the poor from the unexpected crisis(Tripathi, 2015 4). The poor therefore, suffers the loss in case ofsuch eventualities. Such businesses can only thrive when the borrowerhas sufficient insurance cover incase of eventualities and is capableof retaining some revenue as savings. While the small loans increasethe number of small businesses ownership and investments, majority ofthem enjoy less incremental income. Research conducted by theInnovations for Poverty Action movement in Canada indicated that,access to micro loans led to expanded business activities but theinvestment did not result to significant increase in profits.

Inconclusion, small loans to the poor are important but not sufficientto transform their lives. Such loans should be accompanied bytraining on credit management, identifying market linkages andopportunity identification. Also, the poor people should be able toaccess affordable insurance for their businesses to protect them fromunpredictable eventualities. Proper training will ensure that thepeasants only apply for loan when necessary and the same loan isapplied appropriately in the business and not for consumption.

Bibliography

Tripathi,M (2015). Microcredit won`t make poverty history. TheGuardian,web retrieved 8thMay 2015,&lthttp://www.theguardian.com/business/2006/oct/17/businesscomment.internationalaidanddevelopment&gt

Westover,J. (2008),“The Record of Microfinance: The Effectiveness/Ineffectiveness ofMicrofinance Programs as a Means of Alleviating Poverty.”ElectronicJournal of Sociology.