Micro Finance and Economic Development
A2 Macroeconomics, Autumn 2013
Basics of Micro Finance
Micro-credit - provision of small-scale loans to the poor
Micro-savings – for example, voluntary local savings organisations provided by charitiesMicro-insurance- especially for people and businesses not traditionally served by commercial insurance businesses
Remittance management – e.g. transfer payments made through mobile phone solutions
Aims of Micro Finance
Poverty reduction
(the original
aim) through financial inclusion
Raising domestic savings in lowest income
countries
Protection against income
volatility (insuranc
e)
Sustainable finance for new
enterprises
Gender empower
-ment
Microfinance has long been used in developing countries to help poor entrepreneurs who cannot access mainstream finance
Professor Muhammad Yunus Started the
Grameen Bank (GB) more than 30 years ago with the aim of reducing poverty by providing small loans to the country’s rural poor
At the end of 2009 in Bangladesh, there were 20.5 million active borrowers and the average loan per borrower was $114.
The rapid growth of Grameen
The organisation now has 2,565 branches and total lending stands at 6bn taka ($77m), with a 97 per cent loan recovery rateGrameen now has 30 companies to its name e.g. Grameen Danone
Grameen Danone• produces
yoghurt with added nutrients
Grameenphone• Subsidiary with
Norway’s Telenor
Grameen America
Grameen America
Micro Finance in ActionThe World Health Organisation says 2.5bn people lack adequate sanitation. This undermines development and spreads illness – an estimated 1.8m die every year from diarrhoeal diseases, accounting for the vast majority of deaths of children under five.
Micro Finance in Action
Sanergy is a social enterprise focused on making sanitation accessible, affordable and hygienic in Africa slums. Their work is being piloted in informal settlement in Nairobi, Kenya
Critics of Micro Finance
Debt
•Sub-prime style lending, charged high rates of interest
•Coercive collection practices by some lenders
Savings
•Sustainable savings more important in long run - real incomes need to rise
•Credit just one factor in lifting income or output
Cash
•Esther Duflo - direct cash transfers and better funding of skills training have bigger effect
Invest
•Credit is often used to finance consumption
•Micro-finance cannot compensate for inadequate healthcare, education or infrastructure
Verdicts on Micro Finance
Microfinance can't operate in a vacuum, it must be
part of a broader strategy. There is a strong argument
for supporting small and medium-sized enterprises
for which microfinance institutions have no
demonstrated comparative advantage.
Maren Duvendack, lecturer in development economics,
University of East Anglia
Micro Insurance
Safety net will envourage less risk averse behaviour
Insurance can be a spring-board as well as a safety net
Insurance can help smooth volatility in income and spending
Risk-taking behaviour More children
from poorer families will be able to continue their education
Many of the poorest spend large sums of funerals - insurance reduces this burden
Life insurance schemes promote small scale saving
Schooling, Death and
Saving
What are some of the Limits / Risks from Micro Insurance?
Moral hazard• The chance that the insured will be more
careless and take greater risks because he or she is protected,
Adverse selection• When individuals buying a particular
insurance policy have a much higher than average chance of making a claim
Asymmetric information• When different parties have unequal
access to information in a market.
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