Impact of microfinance institutions in poverty alleviation in rural area in Rwanda case study COPEDU Ltd Rwamagana branch

CHAPTER TWO: LITERATURE REVIEW

2.0: INTRODUCTION

This chapter broadly aims to review the existing literature to arrive at conceptual understandings. It expands on definition of key terms according to different authors and these including; microfinance historical background and evolution,micro finance,micro finance institutions, characteristics of micro finance, poverty alleviation, detailed issues on poverty, poverty, role of micro finance institution, functions of microfinance institutions in Rwanda.

2.1: MICROFINANCE HISTORICAL AND BACKGROUND AND EVOLUTION

The concept of microfinance was developed three decades ago on the basis of its successful experience in Asia (Bangladesh) by Grameen Bank that grants credits to the poor. The Grameen Bank is concerned with marginalized people. It was introduced by Professor Muhammad YUNUS and was considered as a bank for the poor.It began operating since 1976 in the village of Jobra (in Indonesia). Since 1983, this project has been transformed into an independent bank by the Government Ordinance. In this study considers Muhammad YUNUS as the founder of the microfinance movement.

Thornton(2000; 22), talking about microfinance evolution, says that:[The microfinance phenomenon significantly expanded a few years ago. The success of microfinance institutions like the Grameen Bank in Bangladesh, the Banco Sol in Bolivia and many others elsewhere, was the origin of a generalized grip of consciousness that microfinance could play role in many domains towards the improvement of living standards of the poor, by facilitating access to financial services and job creation until the procurement of investors].

Regarding microfinance evolution, Robinson (2001; 53) also says «By the 1980's however, numerous institutions in many parts of the developing world were providing micro-credit and recovering their loans. The Grameen Bank `s group lending methodology, part of paradigm shift in microfinance, becomes widely adopted by institutions in many of the world.» The 1980's represent a turning point in the history of microfinance, by the end of that decade; the paradigm shift was well under way. Both the Grameen and BRI (Bank Rekyat Indonesia) showed that micro-finance institutions would reach more one million borrowers with very high repayment rates.

From the 1990`s until now, microfinance operates as an industry of its own as the same author continues to say, «By the late 1990, commercial microfinance was no long limited to a small group of scattered institutions. It was an industry, a fledgling industry, but a rapidly growing one» The microfinance approach is used all over the world as an instrument of poverty reduction because it gives easy access to credit the poor, especially women and other people excluded from the formal financial system because of their social and financial status. What is new in the Grameen Bank system, which is used in many microfinance institutions, is that consists of forming groups of five persons and asking each one in them to grant the repayment of the remaining four members of the group.

Today, microfinance institutions view permanent reduction of poverty by addressing the multiple dimension of poverty with the aim of reaching specific Millennium Development Goals (MDGs) in education, women's empowerment, and health, among others. Even if developing countries need to integrate microfinance programs, developed countries do also take it as an essential element in their financial system.