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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