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Since the previous ten years, politicians from various international financial organizations have become increasingly concerned about the issue of poverty in emerging nations because their efforts to decrease it have not been able to make a substantial dent. Also, international financial organizations have started to provide more support to efforts aimed at alleviating the poverty of the large number of poor that represent many developing countries. About one billion people still live in absolute poverty in the region. Most of the poor live in the rural areas, and are engaged in agricultural activities or a variety of micro- enterprises. The reason behind extreme poverty is that the poor are vulnerable to income fluctuations and hence are exposed to risk.
Most formal financial institutions do not serve the poor because of perceived high risks; high costs involved in small transactions, perceived low profitability, and most importantly, an inability to provide the physical collateral generally required by such institutions. Most poor and low-income households continue to rely on meager self-finance or informal sources of finance. What international financial organizations do to alleviate poverty in developing countries is- they provide an efficient provision of savings, credit, and insurance facilities which enables the poor to smooth their consumption, manage risks better, gradually build assets, develop micro-enterprises, enhance income earning capacity, and generally enjoy an improved quality of life. Also, with improved access to institutional micro-finance, the poor can actively participate in and benefit from development opportunities.
Microfinance initiatives indicate that underprivileged households are capable of saving money instead of borrowing it and that it is possible to successfully mobilise these funds. Contrary to common belief, the poor are creditworthy, and financial services can be offered to the poor profitably at low transaction costs without the need for tangible collateral.. Finally, micro-finance services contribute to the development of rural financial markets and to strengthening the social and human capital of the poor.