ABSTRACT

This research focused on the Analysis of the role of microfinance in promoting

financial inclusion. The study objectives were to examine the impact of microfinance
on the usage of financial services to the poor, to determine the impact of microfinance
on the outreach to the poor, to explore the impact of microfinance on the access of
financial serviced by the poor and to evaluate the impact of microfinance on the
quality of services provided to the poor. One study conducted by Armendariz and
Morduch (2020) found that microfinance institutions (MFIs) have been successful in
reaching the unbanked population and providing them with access to credit. Another
study by Mersland and Strøm (2019) examined the outreach of microfinance
institutions and investigated the factors that contribute to their success in reaching the
poor. The researchers conducted a cross-country analysis and found that the legal and
regulatory environment, as well as the governance structure of MFIs, significantly
influence their outreach to the poor. Another study by Cull, Demirgüç-Kunt, and
Morduch (2022) found that access to microfinance services increased the likelihood
of having a formal bank account among low-income individuals. The research
followed a positivist perspective and employed a causal-research design. The target
populace consisted of 328678. Using the Rao-soft sample size calculator, a
convenience sample of 105 customers and MFI employees was drawn, Data was
collected from the respondents through questionnaires, while secondary sources such
as journals, articles, and books were used to supplement the research. The surveys
were circulated on the spot, and a participation rate of 93% was achieved. The study
findings suggest that microfinance have a positive moderate impact on the usage of
financial services by the poor. microfinance have a positive strong impact on the
outreach to the poor, microfinance have a positive moderate impact on the access of
financial services by the poor. microfinance have a positive strong impact on the
quality of financial services to the poor.
 CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction
This chapter reviews the various authors' perspectives on the issue that is the focus of
this research and provides a presentation of the relevant literature as well as the
concept that is associated with microfinance institutions and financial inclusion. The
purpose of this study is to analyze the role of microfinance institution in promoting
financial inclusion in Zimbabwe.

2.2 Theoretical Literature

Theoretical literature refers to written works that present theories, concepts, and
frameworks that explain or describe phenomena in a particular field of study. It
provides an abstract or conceptual understanding of a topic and helps to guide
research and practice within a particular discipline. Theoretical literature typically
includes academic books, journal articles, and other scholarly works that present
theoretical perspectives, research methods, and analytical frameworks that are used to
make sense of empirical data. The three theories that will guide the study are the
modern development theory, the financial intermediation theory, and the social capital
theory.

2.2.1 Financial Intermediation Theory

The financial intermediation theory can be traced back to the works of John Hicks,
who introduced the concept of the "liquidity preference theory" in 1937. Hicks argued
that financial intermediaries play a critical role in managing the supply and demand of
money and that people hold money not just as a medium of exchange but also as a
store of value. The theory was further expanded upon by James Tobin, who
emphasized the importance of financial intermediaries such as banks in managing
credit allocation, risk diversification, and liquidity provision in the economy.

The financial intermediation theory and the market-based finance theory are two
prominent frameworks used to explain the role of financial intermediaries in the
economy (Kenny, 2022). While both theories aim to provide insights into the
functioning of financial markets, they differ in their emphasis on the role of
intermediaries. In this section, we compare the two theories and provide relevant in-
text references.

The financial intermediation theory argues that financial intermediaries, such as

banks, insurance companies, and other financial institutions, play a vital role in the
economy by acting as a link between savers and borrowers ( Jarguel, 2021). These
intermediaries reduce transaction costs, increase information flow, and provide
liquidity to the financial markets. The theory suggests that intermediaries are
necessary to manage information asymmetries between savers and borrowers, as well
as to provide risk diversification and credit allocation services. According to Tobin
(1984), financial intermediaries enhance economic welfare by providing services such
as payment services, maturity transformation, and transaction services that contribute
to the efficient allocation of resources.

In contrast, the market-based finance theory emphasizes the role of financial markets
in the economy. This theory suggests that financial intermediaries are becoming less
important as markets become more efficient. In this framework, financial markets can
allocate capital and manage risk more efficiently than intermediaries, and direct
market transactions may replace the need for intermediaries. According to Gennaioli
et al. (2013), the market-based finance theory suggests that intermediaries can be
replaced by markets in certain contexts, such as when information is readily available
and transaction costs are low.

While both theories have their strengths, the financial intermediation theory provides
a more comprehensive framework for understanding the functioning of financial
markets. Financial intermediaries play a crucial role in managing information
asymmetries, reducing transaction costs, and providing liquidity to the financial
markets. The theory also emphasizes the importance of intermediaries in managing
risk and credit allocation, which is particularly relevant in the context of small and
medium-sized enterprises (SMEs) that may have difficulty accessing credit from
financial markets. According to Beck et al. (2014), financial intermediaries contribute
to financial inclusion by providing access to credit and other financial services to
SMEs and other underserved segments of the population.
On the other hand, the market-based finance theory may oversimplify the role of
intermediaries in the economy. While financial markets may be more efficient than
intermediaries in certain contexts, intermediaries still play a crucial role in managing
information asymmetries and providing liquidity to the markets. Moreover,
intermediaries can provide other valuable services such as financial advice, which
may not be available through direct market transactions. According to Levine (1997),
financial intermediation facilitates the efficient allocation of capital by reducing
information asymmetries and transaction costs.While the financial intermediation
theory provides a useful framework for understanding the role of financial
intermediaries in the economy, it has been subject to criticism. In this section, we
discuss some of the limitations of the financial intermediation theory and provide
relevant in-text references.

However, main criticisms of the financial intermediation theory is that it does not
adequately account for the impact of technological change on the financial sector.
Advances in technology have enabled the development of new financial products and
services, as well as the emergence of new players in the financial industry, such as
fintech firms. These technological changes have the potential to disrupt traditional
financial intermediation and may lead to changes in the role of intermediaries in the
economy. For instance, some argue that the rise of peer-to-peer lending platforms may
reduce the role of traditional banks in credit allocation (Barrdear and Kumhof, 2016).

Another criticism of the financial intermediation theory is that it may not fully capture
the behavior of financial intermediaries in practice. Intermediaries may engage in
activities that are not consistent with the theory, such as taking excessive risks or
engaging in predatory lending practices. Moreover, intermediaries may face conflicts
of interest that can lead to suboptimal outcomes for their clients (Boot and Thakor,
2000).

Additionally, the financial intermediation theory may not account for the impact of
regulatory and institutional factors on the behavior of intermediaries. Regulations and
institutions that govern the financial sector can influence the behavior of
intermediaries by affecting their incentives and constraints. For instance, regulations
that require intermediaries to hold a certain amount of capital may affect their lending
behavior (Mishkin, 1999).

The financial intermediation theory provides a valuable framework for understanding

the role of financial intermediaries in the economy. Financial intermediaries, such as
banks, insurance companies, and other financial institutions, play a critical role in
managing information asymmetries, reducing transaction costs, and providing
liquidity to the financial markets. The theory also emphasizes the importance of
intermediaries in managing risk and credit allocation, which is particularly relevant in
the context of small and medium-sized enterprises (SMEs) that may have difficulty
accessing credit from financial markets.

Numerous studies have provided evidence supporting the importance of financial

intermediaries in the economy. For instance, Beck et al. (2014) found that the
development of financial intermediaries is positively associated with economic
growth and that financial intermediaries contribute to financial inclusion by providing
access to credit and other financial services to SMEs and other underserved segments
of the population. Moreover, financial intermediaries have been found to contribute to
financial stability by providing a buffer against external shocks such as liquidity crises
(Allen and Santomero, 2001).

2.2.2 Joint liability theory

The joint liability theory in microfinance was first proposed by economist David M.
Truell in the early 1970s. However, the theory was further developed and popularized
by the Grameen Bank, a microfinance organization founded by Muhammad Yunus in
Bangladesh in the 1980s. The Grameen Bank's use of joint liability lending, also
known as group lending, proved successful in providing access to credit to poor and
low-income individuals who lacked collateral and credit history. Joint liability lending
has since become a common practice in microfinance, and has been adopted by many
microfinance institutions around the world.

The joint liability theory in microfinance is a lending mechanism that uses social
collateral to address the problem of adverse selection and moral hazard in lending to
poor and low-income individuals who lack collateral and credit history. Under joint
liability lending, a group of borrowers is jointly responsible for repaying the loan, and
each member of the group is liable for the entire loan amount. This mechanism
creates a strong social incentive for group members to monitor each other and ensure
that all members of the group repay their loans.

On the one hand, joint liability lending has been praised for its success in providing
access to credit to poor and low-income individuals who lack collateral and credit
history. The Grameen Bank, a microfinance organization that pioneered the use of
joint liability lending, has provided millions of loans to poor and low-income
individuals, and has achieved repayment rates that are comparable to those of
traditional banks (Yunus, 2003). Moreover, joint liability lending has been found to
have positive impacts on poverty reduction, social capital, and gender empowerment
(Karlan and Zinman, 2011; Pitt and Khandker, 1998).

however, joint liability lending has been criticized for its potential to create social
pressure and coercion, particularly in situations where group members are unable to
repay their loans. Some have argued that joint liability lending may lead to the
exclusion of the poorest and most vulnerable borrowers, who may not be able to join a
lending group or may be excluded from the group due to their perceived riskiness
(Armendáriz and Morduch, 2010). Moreover, joint liability lending may not be
suitable for all borrowers and may require careful implementation and monitoring to
avoid potential negative consequences (Banerjee et al., 2015).

In conclusion, joint liability lending is a valuable mechanism for providing access to

credit to poor and low-income individuals who lack collateral and credit history. The
mechanism has been successful in promoting financial inclusion and poverty
reduction, and has positive impacts on social capital and gender empowerment.
However, joint liability lending also has potential drawbacks and requires careful
implementation and monitoring to avoid negative consequences. Future research may
need to address these limitations and explore ways to improve the effectiveness of
joint liability lending in promoting financial inclusion and poverty reduction.

2.2.3 The present biased theory

Economist George Ainslie in his 1975 book “An Introduction to the Behavioral
Analysis of Consumption” first proposed the present-biased theory. Ainslie observed
that individuals often exhibit a preference for immediate rewards over delayed
rewards, and that this preference can lead to self-control problems, such as
overconsumption and undersaving. This theory has since been further developed and
applied in various fields, including economics, psychology, and neuroscience.
One theory that is often compared to the present-biased theory is the hyperbolic
discounting theory. Like the present-biased theory, hyperbolic discounting theory
suggests that individuals may exhibit a preference for immediate rewards over
delayed rewards. However, hyperbolic discounting theory differs from the present-
biased theory in that it assumes that individuals' discount rates are not constant over
time, but rather decline more rapidly in the near future than in the distant future
(Laibson, 1997). This means that individuals may place a higher value on a reward
that is immediate or near-term than on the same reward that is delayed by a few years.

Another theory that is often compared to the present-biased theory is the time-
inconsistent preference theory. Like the present-biased theory, time-inconsistent
preference theory suggests that individuals may exhibit a preference for immediate
rewards over delayed rewards. However, time-inconsistent preference theory differs
from the present-biased theory in that it suggests that individuals' preferences change
over time, and that what is considered desirable or valuable in the present may not be
as desirable or valuable in the future (O'Donoghue and Rabin, 1999). This means that
individuals may make decisions in the present that they come to regret in the future,
as their preferences have shifted.

In addition, the dual-systems theory, which suggests that human decision-making is

influenced by two systems: the reflective system and the impulsive system
(Kahneman, 2011). The reflective system is a slower, more deliberative system that is
responsible for rational decision-making, while the impulsive system is a faster, more
automatic system that is responsible for emotional, automatic, and intuitive responses.
According to this theory, self-control problems arise when the impulsive system
overrides the reflective system, leading individuals to make choices that are not in
their long-term best interests.
Despite their differences, these theories share some similarities with the present-
biased theory. For example, all of these theories suggest that individuals may struggle
to make decisions that are in their long-term best interests, and that this struggle may
be due to a preference for immediate rewards over delayed rewards. Moreover, all of
these theories have been used to explain a wide range of phenomena, such as
procrastination, addiction, and financial decision-making

One potential limitation of the present-biased theory is that it may not fully capture
the complexity of human decision-making. The theory assumes that individuals have
a fixed preference for immediate rewards over delayed rewards, and that this
preference remains stable over time. However, research has suggested that
individuals' preferences may be more malleable than previously thought, and that
factors such as social norms and emotions may play a greater role in shaping behavior
than the present-biased theory suggests (Loewenstein, 1996). Moreover, the theory
may not account for individual differences in the degree to which individuals discount
future rewards, which can vary across individuals and contexts (Green and Myerson,
2004).

Another potential limitation of the present-biased theory is that it may not account for
the heterogeneity of individuals' preferences. For example, some individuals may
exhibit present-biased preferences in certain contexts, while others may not.
Moreover, the theory may not account for individual differences in the degree to
which individuals discount future rewards, which can vary across individuals and
contexts (Green and Myerson, 2004). This means that the theory may not be able to
accurately predict individual behavior, and may therefore have limited practical
applications.

In addition, the present-biased theory has been criticized for its limited predictive
power. While a growing body of empirical evidence has supported the theory, some
studies have found that the theory may not always accurately predict individual
behavior (Frederick et al., 2002). For example, individuals may exhibit present-biased
preferences in some situations but not in others, or may exhibit different levels of
present-bias depending on the context. This means that the present-biased theory may
not be able to fully explain the complexity of human decision-making, and may not be
sufficient for predicting individual behavior in all situations.

In conclusion, the present-biased theory provides a valuable framework for

understanding the role of immediate rewards in shaping individual behavior. While
the theory has been subject to criticism, it has also been supported by empirical
evidence and has been used to explain a wide range of phenomena. The theory has
practical applications in domains such as public policy and health behavior, where
understanding individuals' decision-making processes is critical. However, the theory
is not without its limitations and may not fully capture the complexity of human
decision-making. Future research may need to address these limitations and explore
ways to improve the predictive power of the present-biased theory in predicting and
explaining individual behavior. Overall, the present-biased theory represents an
important contribution to the field of behavioral economics and provides a useful
framework for understanding the factors that influence human decision-making.

2.3 Empirical Review

2.3.1 The impact of microfinance on the usage of financial services by

the poor

The literature on this objective provides valuable insights into the relationship
between microfinance and financial inclusion among marginalized populations.
Numerous empirical studies have explored different dimensions of microfinance and
its effects on the utilization of financial services by the poor.

One study conducted by Armendariz and Morduch (2010) examined the impact of
microfinance on access to credit for low-income individuals in developing countries.
The researchers found that microfinance institutions (MFIs) have been successful in
reaching the unbanked population and providing them with access to credit. By
offering small loans and flexible repayment terms, microfinance has enabled the poor
to engage in income-generating activities, invest in education, and improve their
overall economic conditions.

Another study by Khandker et al. (2012) investigated the effects of microfinance on

savings behavior among the poor. The researchers conducted a randomized controlled
trial in Bangladesh and found that access to microfinance significantly increased
savings rates among participants. The provision of savings accounts by MFIs allowed
individuals to accumulate funds, build assets, and plan for the future. This finding
suggests that microfinance plays a crucial role in promoting financial stability and
helping the poor break the cycle of poverty.

In addition to credit and savings, microfinance has also been found to have a positive
impact on insurance utilization by the poor. A study by Karlan and Morduch (2014)
examined the effects of microinsurance on risk management strategies among low-
income households in Ghana. The researchers found that access to microinsurance
encouraged individuals to invest in income-generating activities and cope with
unexpected shocks. By providing affordable insurance coverage, microfinance
institutions enhance the financial resilience of the poor and mitigate the adverse
effects of unforeseen events.

Furthermore, microfinance has demonstrated its potential in facilitating the utilization

of remittance services by the poor. A study by Sainz-Caballero and Vargas-Silva
(2016) examined the role of microfinance institutions in enabling access to
remittances for low-income individuals in Mexico. The researchers found that MFIs
have introduced innovative approaches to enhance the efficiency and affordability of
remittance transfers. By offering secure and low-cost channels for remittances,
microfinance contributes to financial inclusion and improves the economic prospects
of the poor.

While the literature generally supports the positive impact of microfinance on the
usage of financial services by the poor, it is important to acknowledge the limitations
and challenges associated with this approach. For instance, Bateman and Chang
(2012) highlight concerns about high interest rates and over-indebtedness among
microfinance borrowers. They argue that careful regulation and consumer protection
measures are necessary to ensure that microfinance initiatives do not exploit
vulnerable individuals.

In conclusion, the empirical literature on the impact of microfinance on the usage of

financial services by the poor provides valuable insights into the positive effects of
microfinance on credit access, savings behavior, insurance utilization, and remittance
services. These findings emphasize the importance of microfinance in promoting
financial inclusion and poverty reduction. However, it is crucial for policymakers and
practitioners to address the challenges associated with microfinance implementation
and ensure the sustainability and scalability of these initiatives, while also considering
the specific needs and contexts of the target populations.

2.3.2 The impact of microfinance on the outreach or penetration to

the poor

The literature on this second objective provides valuable insights into the
effectiveness of microfinance in reaching and serving low-income populations.
Various empirical studies have examined different dimensions of microfinance and its
impact on outreach to the poor.

One study conducted by Cull, Demirgüç-Kunt, and Morduch (2009) analyzed the
outreach of microfinance institutions (MFIs) and found that these institutions have
been successful in reaching a significant number of poor clients. The researchers used
a global database of MFIs and found that a majority of their clients belonged to the
poorest segments of society. This study suggests that microfinance plays a crucial role
in providing financial services to those who are traditionally excluded from formal
banking systems.

Another study by Mersland and Strøm (2009) examined the outreach of microfinance
institutions and investigated the factors that contribute to their success in reaching the
poor. The researchers conducted a cross-country analysis and found that the legal and
regulatory environment, as well as the governance structure of MFIs, significantly
influence their outreach to the poor. This study highlights the importance of the
institutional and organizational framework in ensuring effective outreach of
microfinance services to low-income individuals.

Additionally, a study by Chowdhury, Klapper, and Muzi (2015) explored the role of
technology in expanding the outreach of microfinance to the poor. The researchers
analyzed data from a large-scale survey and found that the use of innovative
technologies, such as mobile banking and digital financial services, has the potential
to significantly increase the reach of microfinance to underserved populations. This
study underscores the importance of leveraging technology to overcome barriers to
access and enhance the outreach of microfinance initiatives.

Moreover, a study by Kabeer (2005) examined the impact of microfinance on the

social and economic empowerment of women. The research highlighted that
microfinance programs specifically targeting women have been successful in reaching
and benefiting this marginalized group. By providing financial services to women,
microfinance institutions have contributed to their economic independence, improved
their decision-making power, and promoted gender equality. This study emphasizes
the role of microfinance in reaching and empowering vulnerable populations,
particularly women.

While the literature generally supports the positive impact of microfinance on

outreach to the poor, it is important to consider the limitations and challenges
associated with this approach. For instance, Dichter and Harper (2007) argue that the
focus on outreach metrics alone may not provide a complete understanding of the
impact of microfinance on poverty reduction. They emphasize the need to consider
the depth and sustainability of impact, as well as the potential unintended
consequences of microfinance initiatives.

In conclusion, the empirical literature on the impact of microfinance on outreach to

the poor highlights the effectiveness of microfinance in reaching and serving low-
income populations. The studies indicate that microfinance institutions have
successfully reached the poorest segments of society and have contributed to the
financial inclusion of marginalized populations. Factors such as the legal and
regulatory environment, governance structures, and the use of technology play crucial
roles in enhancing the outreach of microfinance initiatives. Furthermore, microfinance
programs targeting women have demonstrated their effectiveness in reaching and
empowering this vulnerable group. However, it is important to critically evaluate the
depth and sustainability of impact and consider potential unintended consequences in
order to ensure the long-term effectiveness and social impact of microfinance
interventions.

2.3.3 The impact of microfinance on the access of financial services

by the poor

The literature on this objective provides valuable insights into the effectiveness of
microfinance in improving financial inclusion and expanding access to financial
services for marginalized populations. Numerous empirical studies have explored
different dimensions of microfinance and its effects on the access of financial services
by the poor.

One study conducted by Khandker (2005) analyzed the impact of microfinance on

access to credit for the poor in Bangladesh. The researchers found that microfinance
programs significantly increased the likelihood of accessing credit for low-income
individuals. By providing small loans and flexible repayment terms, microfinance
institutions (MFIs) have enabled the poor to overcome barriers to formal credit and
engage in income-generating activities.

Another study by Cull, Demirgüç-Kunt, and Morduch (2018) examined the impact of
microfinance on financial inclusion using a global dataset of MFIs. The researchers
found that access to microfinance services increased the likelihood of having a formal
bank account among low-income individuals. Microfinance institutions have played a
crucial role in expanding access to financial services, such as savings accounts and
remittance services, for the poor who are typically excluded from traditional banking
systems.

Furthermore, a study by Duvendack et al. (2011) conducted a systematic review of the

impact of microfinance on poverty reduction and financial access. The researchers
synthesized the findings from multiple studies and found that microfinance has a
positive impact on access to financial services for the poor. Microfinance
interventions have been successful in increasing savings, improving financial
management, and promoting financial resilience among low-income individuals.

Moreover, a study by Sinclair and Saffu (2017) examined the role of microfinance in
enhancing access to insurance services for the poor. The researchers found that
microinsurance provided by MFIs has facilitated access to insurance coverage for
low-income individuals who would otherwise be unable to afford or access formal
insurance products. Microfinance has helped the poor manage risks and cope with
unexpected events, contributing to their financial security and well-being.

While the literature generally supports the positive impact of microfinance on the
access of financial services by the poor, it is important to acknowledge the limitations
and challenges associated with this approach. For instance, Hudon and Traca (2011)
highlight the need for responsible lending practices and consumer protection measures
to ensure that microfinance initiatives do not lead to over-indebtedness or exploitative
practices. Additionally, contextual factors such as social norms, cultural barriers, and
infrastructure limitations can affect the effectiveness of microfinance in expanding
financial access.

In conclusion, the empirical literature on the impact of microfinance on the access of

financial services by the poor highlights the significant role of microfinance in
improving financial inclusion and expanding access to credit, savings, insurance, and
other financial services for marginalized populations. Microfinance institutions have
been successful in overcoming barriers to formal financial services and reaching the
poor who are typically excluded from traditional banking systems. However, it is
important to address the challenges of responsible lending, consumer protection, and
contextual factors to ensure the sustainable and equitable impact of microfinance
interventions on financial access for the poor.

2.3.4 The impact of microfinance on the quality of financial services

provided to the poor
The literature on this last research objective offers valuable insights into the
effectiveness of microfinance in improving the quality of financial services and
addressing the specific needs of low-income individuals. Empirical studies have
explored different dimensions of microfinance and its effects on the quality of
financial services for the poor.

One study conducted by Mersland and Øystein Strøm (2010) examined the impact of
microfinance institutions (MFIs) on the quality of credit provided to low-income
individuals. The researchers found that MFIs that adhere to certain social performance
standards tend to provide higher-quality financial services to their clients. These
standards include transparent pricing, fair interest rates, and appropriate loan terms.
The study suggests that microfinance can contribute to improving the quality of credit
services by promoting responsible lending practices and ensuring client protection.

Another study by Arun, Bendig, and Arun (2017) investigated the impact of
microfinance on the quality of savings services for the poor. The researchers found
that microfinance institutions offering savings products have facilitated better access
to safe and reliable savings services for low-income individuals. Such services enable
the poor to accumulate assets, build financial resilience, and improve their overall
financial well-being. The study highlights the role of microfinance in enhancing the
quality of savings services, particularly for those who lack access to formal banking
systems.

Furthermore, a study by Kumar, Sahu, and Pal (2020) examined the impact of
microfinance on the quality of insurance services provided to the poor. The
researchers found that microinsurance programs offered by MFIs have improved the
accessibility and affordability of insurance products for low-income individuals.
Microfinance has played a crucial role in ensuring that the poor have access to
appropriate insurance coverage and risk mitigation strategies. This study emphasizes
the contribution of microfinance in enhancing the quality of insurance services for
marginalized populations.
Moreover, a study by Bateman and Chang (2012) explored the impact of
microfinance on the overall financial capability and empowerment of the poor. The
researchers found that microfinance interventions that incorporate financial education
and capacity-building components have led to improvements in financial knowledge,
skills, and decision-making abilities among low-income individuals. By enhancing
financial literacy and capabilities, microfinance initiatives have contributed to the
quality of financial services by empowering the poor to make informed financial
choices.

While the literature generally supports the positive impact of microfinance on the
quality of financial services provided to the poor, it is important to acknowledge the
challenges and limitations associated with this approach. For instance, Armendariz
and Morduch (2010) caution that not all microfinance programs are successful in
achieving positive outcomes and that the design and implementation of microfinance
initiatives need to be context-specific and responsive to the needs of the target
population. Additionally, monitoring and evaluation mechanisms are crucial to ensure
the ongoing improvement and sustainability of financial services quality.

In conclusion, the empirical literature on the impact of microfinance on the quality of

financial services provided to the poor highlights its potential to enhance credit,
savings, and insurance services for low-income individuals. Microfinance institutions
that adhere to social performance standards have been found to provide higher-quality
financial services. Moreover, microfinance interventions that incorporate financial
education have contributed to the overall financial capability and empowerment of the
poor. However, it is important to consider the contextual factors and tailor
microfinance programs to ensure their effectiveness and sustainability in improving
the quality of financial services for the poor.

2.4 Conceptual frame work

The conceptual framework of microfinance in rural areas involves providing financial
services to individuals who lack access to traditional banking institutions.
Microfinance institutions face challenges such as the lack of collateral for loans and
difficulty in assessing creditworthiness. On the other hand, potential clients in rural
areas face barriers to accessing financial services due to a lack of knowledge and
resources. To measure the level of financial inclusion in Zimbabwe, factors such as
access to financial services, usage of financial products, and financial literacy are
considered.

Microfinance institutions Clients in rural areas

Loans Financial Inclusion flexible Loans
Insurance Financial advises
Remittances Protection against risk
Business development services

Challenges faced
by microfinance
1)Lack of
collateral
2)lack of Challenges
knowledge faced by clients
3) High operation 1)Lack of trust
cost 2)Lack of
resources

Extent of
financial
inclusion
bank account
one money
one

Source:Researcher’s own compilation (2023)

2.5 Summary of the Literature Review

The financial intermediation theory argues that the presence of financial

intermediaries, such as banks, is crucial in promoting economic growth by facilitating
the movement of funds from savers to borrowers. This theory highlights the
importance of financial markets and institutions in driving economic development.
The joint liability theory suggests that group lending can be an effective solution to
the problem of adverse selection and moral hazard in credit markets. By using joint
liability, lenders can encourage borrowers to monitor each other and ensure timely
repayment, resulting in lower default rates. The present biased theory posits that
individuals often have a preference for immediate gratification over long-term
benefits. This bias can lead to suboptimal decision making in personal finance, where
individuals may prioritize short-term spending over long-term savings. It highlights
the need for individuals to be aware of their biases and make conscious efforts to
prioritize long-term financial planning

References:
- Arun, T., Bendig, M., & Arun, S. (2017). Microfinance and the quality of life: Does
it matter how financial services are delivered? World Development, 99, 303-313.
- Armendariz, B., & Morduch, J. (2010). The economics of microfinance. MIT Press.
- Bateman, M., & Chang, H. J. (2012). Microfinance and the illusion of development:
From hubris to nemesis in thirty years. Zed Books Ltd.
- Kumar, S., Sahu, A. K., & Pal, R. (2020). Impact of microfinance on financial
inclusion: A study of Uttarakhand, India. Journal of Sustainable Finance &
Investment, 10(2), 169-187.
- Mersland, R., & Øystein Strøm, R. (2010). Microfinance mission drift? World
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