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Sustainable Microfinance Institutions For Poverty Reduction In Malaysia Economics Essay

sustainability of microfinance institutions

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The economically active poor in most economies of the world especially people in the rural areas are excluded from the formal financial sector [1]. Usually referred to as the "unbankable", which mean that the formal conventional banking system has no provision for them, therefore they are excluded from their clientele. This must have accounted for low level of financial literacy by this category of people in most economies. Surprisingly, this informer sector usually constitutes the larger percentage of the population especially in developing countries. From a recent research by United Nation with data from World Bank and International Labor Organization, in Sub-Saharan Africa, the informer sector constitute 80%; 70% in Indian, Indonesia, Pakistan, Philippine. Thailand, Turkey, and Brazil accounts for 50% while Mexico, Chile and Portugal have 40%, 38%, and 30% respectively [1]. Hence, different communities have been concerned about poverty alleviation which has led to establishment of local co-operatives, thrift and credit unions, in order to provide financing to the poor people in the society. Women have been found to constitute higher percentage of this group of people in many regions, thus falling into one association or another to pool their small savings together to assist one another based on trust. The most common example is the Rotating Savings and Credit Union where members lend their pool of savings to each member in the association until it went round the entire members. Social and economic development of members are the main goals of micro-credit organizations and not profit making. But in recent years, activities of these micro credit institutions have become so popular and they have doubled in number. It has only being within the last four decades, however, that serious global efforts have been made to formalize financial service provisions to the poor. This process began in earnest around the early to mid-1980s and has since gathered an impressive momentum. Today

there are thousands of MFIs providing financial services to an over 400 million of the world's poor. It has being reported that estimated that about 35% of the world 1.2 billion Muslims are poor [2]. What began as a grass-roots "movement" motivated largely by a development paradigm is evolving into a global industry informed increasingly by a commercial/finance paradigm. The growth of microfinance in the last ten years has been so extraordinary to the extent that it was accorded a global recognition. Such that 2005 was declared by United Nations as the "International Year of micro-credit" and a Noble Prize Award was given to the founder of Grameen Bank in Bangladesh. The success of this industry in recent time has become a big attraction to international investment banks and lenders. Successful entrepreneurs like Bill Gates, Pierre Omydiar (the eBay founder) are now actively involved through their foundations in building up the scale of microfinance activities. World's largest banks like Citigroup, Deutsche Bank, Commerce bank, HSBC, ING, ABN AMRO and Morgan Stanley have also entered the "double-bottom line" industry. Meanwhile, sustainability is no doubt a means to an end- that is to achieve outreach by microfinance institutions to their poor clients. Therefore the objective of this paper is to examine the state of microfinance institutions in Malaysia; their outreach to the poor households and most especially their sources of funds for sustainable financing. The next Section of the work examines the current trends in the global Microfinance Industry as a background to the discussion that follows on the industry in Malaysia. This is followed by the method; overview and analyzes of the industry in Malaysia in respect to incidence of poverty; sources of funds and sustainability; and the outreach of the major MFIs. The following section includes a discussion on capital market integration of MFIs aimed at providing a sustainable financing to MFIs and the last section presents discussions, conclusion with policy implementations.

New Paradigm in Microfinance

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