Microfinance Flashcards
What is micro-credit
Provision of small-scale loans to the poor
What are micro-savings
E.g. voluntary local savings organisations provided by charities
What is micro-insurance
Especially for people and businesses not traditionally served by commercial insurance businesses
What is remittance management
E.g. transfer payments made through mobile phone solutions
Main aims of micro-finance
- reduce poverty
- raise domestic savings
- protect against income volatility (insurance)
- sustainable finance for new enterprises
- gender empowerment
4 criticisms of micro-finance
Debt
Savings
Cash
Invest
Criticisms of micro-finance: debt
- sub-prime lending, high interest rates
- coercive collection practices by some lender says
Criticisms of micro-finance: savings
- sustainable savings are more important in the LR
- credit just one factor in lifting income or output
Criticisms of micro-finance: cash
Randomised control trials suggest that microfinance is ineffective
Criticisms of micro-finance: invest
Credit is often used to finance consumption and not investment
Micro insurance - risk taking behaviour
Safety net of insurance will encourage less risk averse behaviour
Micro insurance - schooling, death and saving
Poorer children will be able to continue their educational
Reduces funeral costs
Limits / risks of micro insurance
Moral hazard
Adverse selection
Asymmetric information
Benefits of micro-credit
Helps overcome savings gap Entrepreneurship Targeted at women High rates of repayment Build on social capital / trust
Disadvantages of micro-credit
Very high interest rates Limits to scalability Low success rate for new businesses Alleged forcible collection of debt Relatively ineffective compared to remittances and FDI
