Micro-finance institution lending and the growth of small and medium enterprise in hargeisa, somaliland.

Abstract

This chapter covered the background of the study, the main and specific objects of the study, the problem statement, and the significance of the study, study scope, research questions, and limitation of the study. 1.1 Background of the Study According to Otero (1999, p.8) he defined micro finance as "the provision of financial services to low-income poor and very poor self-employed people". These financial services according to Ledger wood (1999) generally include savings and credit but can also include other financial services such as insurance and payment services. Schreiner and Colombet (2001, p.339) define microfinance as "the attempt to improve access to small deposits and small loans for poor households neglected by banks." Therefore, microfinance involves the provision of financial services such as savings, loans and insurance to poor people living in both urban and rural settings who are unable to obtain such services from the fonnal financial sector. The begi1mings of the microfinance movement are most closely associated with the economist Muhammad Yunus, who in the early 1970's was a professor in Bangladesh. In the midst of a country-wide famine, he began making small loans to poor families in neighboring villages in an effort to break their cycle of poverty. Financial services that allow poor people to save in times of prosperity and borrow or collect insurance when necessary allow them to maintain a consistent level of consumption without selling off income-producing assets. Micro finance can also provide an opportunity for expanding or pursuing new business opportunities that allow poor people to increase or diversify the sources of their income. The terms microcredit and microfinance are often used interchangeably, but it is important to highlight the difference between them because both terms are often confused. Sinha (1998) states "microcredit refers to small loans, whereas microfinance is appropriate where NGOs and MFis supplement the loans with other financial services (savings, insurance, among others)". Therefore microcredit is a component of microfinance in that it involves providing credit to the