The Impact of Microfinance Institutions on Poverty Alleviation in Cameroon: The Case of Limbe Municipality, Cameroon

Abstract

Poverty is a worldwide phenomenon that affects almost all countries of the world, both developed and developing countries. However, poverty is much more widespread in developing countries like Cameroon and women are the worse affected due to their vulnerability. No doubt, microfinance emerges as a very powerful tool to alleviate poverty among the poor population. Therefore, this study assessed Assessing the Effects of Microfinance Institutions On Poverty Alleviation in Limbe Municipality, Cameroon.  The paper employed both primary and secondary sources of data. Sample of 200 respondents was selected from a population of 84,223. Descriptive statistics and chi-square were used to analyze the data and test the hypotheses. The study discovered that microfinance loans play a significant role in income generation and poverty alleviation in general. It recommends that government and non-governmental agencies should encourage the establishment of more microfinance institutions and strengthen the existing ones in both rural and urban areas so as to alleviate women poverty.

INTRODUCTION

1.1 Background to the study

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 move out of Poverty (Sumner, 2007). Traditional aid has not helped in solving this problem (Meehan, 1999).

Microfinance has 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).

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.

1.2 Problem Statement

Poverty is a harsh and undesired phenomenon in mankind. The need for reducing and if possible eradicating it is unquestionable. Based on the evidence on the role of microfinance in socio-economic development and poverty alleviation (Zeller and Meyer, 2002) microfinance programs have increasingly been considered as a component of the main instruments in poverty reduction in recent development agenda

Microfinance is an effective development tool for promoting entrepreneurship and alleviating poverty. Financial services enable poor and low-income households to take advantage of economic opportunities, build assets, and reduce their vulnerability to external shocks that adversely affect their living standards. Yet, much remains unclear about whether, and how, microcredit can help the poor to improve their lives and hence alleviate poverty. All these issues have raised concerns towards investigating the effects of microfinance institutions on poverty alleviation.

In the course of this investigation, we have to answer the following two research questions;

Can Microfinance institutions alleviate poverty?

How can microfinance institutions alleviate poverty?

Answering these questions is particularly important now that the microcredit industry is changing in various ways.

1.3 Objectives of the Study

The main objective of this study is to determine the effects of microfinance institutions on poverty alleviation. Other specific objectives include;

To determine if microfinance institutions contribute to the alleviation of poverty in Cameroon.

To determine how microfinance institutions, contribute to poverty alleviation in Cameroon.

1.4 Hypothesis of the study

Here two statements are made to determine whether or not microfinance institutions affect poverty alleviation. These two statements are known as the null (H0) and the alternative hypothesis (H1).

H0: Microfinance institutions do not have a significant effect on poverty alleviation in Cameroon

H1: Microfinance institutions have a significant effect on poverty alleviation in Cameroon

1.5 Significance of the study

The key reason for undertaking this research is to determine the effects of microfinance institutions on poverty alleviation.

This study is important to several groups including other researchers and the entire community as a whole. These groups stand to benefit from the study in the following respects;

Other researchers: This study will help other researchers who have an interest in further research as their literature review

The community:  this study will help the entire community especially the poor to create awareness in their minds on how they can use microfinance institutions to enrich themselves and alleviate poverty from their lives.