L6

Question 1

What is Diminishing return on capital? What does this mean?

Answer 1

using more capital gives more profit but at reduced rate
->poor entrepreneurs can have high return on their investment
Would assume that money flow from rich to poor

Question 2

How is the ledning situation in poor countries?

Answer 2

High interest rates
Extreme variability in interest rates
Rich can obtain larger loans with lower interest rates
Rates of default is low

Question 3

What is difficult with ledning to the poor?

Answer 3

1. Limited liability
   If can not pay back, bank can not recover loan
   
   2. Limited enforcement
      If borrower refuse to pay back, bank can not force him/her

Question 4

Why does people in poor countries not have good collateral?

Answer 4

They are too poor
Property rights have not certification or can not be defined
Assets are not good as collateral (ex animals)

Question 5

Problem with finding good client

Answer 5

Lender have lack of information about client and about how client will handle the money
Asymmetry in information leads to adverse selection and moral hazard
Screening and monitoring are the solutions

Question 6

Local money lenders

Answer 6

Social, informal lenders
Use screening and monitoring cause they know client and people around, can control what borrower do with money, can tell everybody if loan is not paid back and refuse to lend in future
->low default rates
High interest cause monitoring and screening is very costly

Question 7

Microfinance

Answer 7

Lends to small group that are all responsible for loan
+Lower administration cost (divided on more people)
+Screening cost lower (people select each others)
+Monitoring cost are lower (people monitor each other)
+Less cost to chase default loans (rest of group needs to pay)
=>Lower interest rates, more people investing, more opportunities for women
=>Low default rates
-Newcomers are discriminated because people only want to join with people they know very well
-Does not allow investments with higher risk which are important for economic growth
-Not so flexible
-It is small amount and do not engage in bigger changes

Question 8

Four ways to finance sustainable development

Answer 8

Private domestic funds (borrowing, pension, CSR)
Public domestic funds (manage government funds, domestic resource mobilization)
Private international funds (FDI, NGO)
Public international funds (tax)

Question 9

Four building blocks for integrated national financing frameworks

Answer 9

Assessing and diagnosing (mapping available money and look at how much is needed)
Financing strategy (go from not enough finance to enough and look at finance resources)
Monitoring and review (look at performance in getting money you need)
Governance and coordination

Question 10

Innovative financing

Answer 10

Pooling private and public revenue (use public resources in efficient way)
Find new revenue streams
New incentives to address market failure or scale up ongoing development
(frontloading, debt-based instruments)