The Model Of Microcredit Lending

In both developing and emerging economies, microfinance has vastly and increasingly been seen as one of the most important means for enhancing the lives of the poor and therefore a major tool for economic and social development mostly in rural areas. Lately, contrary to this widespread belief, critics have raised eyebrows against this growing popularity of microfinance as a major tool for enhancing economic development. Contrary to belief, they are of the opinion that microfinance is a ‘make-belief’ that is hindering economic and social development rather than enhancing it.

269). There is no easy way for those with little money to begin earning interest on savings or obtain loans with reasonable interest rates: the banking community is failing the poorest people (Banerjee & Duflo, 2012, p. 269). Also, Banerjee and Duflo (2012) assert that medical and agricultural insurance are not favored by the poor in spite of the fact that they could benefit greatly from such products (269). Their proposed solutions come in the form of microcredit (to provide access to more reasonable loans), electronic money transfer systems (to reduce the fixed costs of saving), and rewarding people for making good financial decisions (either via markets or the government if needed) (Banerjee & Duflo, 2012, p. 270). The incentives could even be something unrelated, such as bed nets, which then help the recipients in more than one way (Banerjee & Duflo, 2012, p. 270). This would need to be coupled with government regulation so that unscrupulous individuals wouldn’t have a way to easily game the system (Banerjee & Duflo, 2012, p. 270).

Poverty has stricken many developing nations. However, there are many ways to limit things like this from occurring, micro-loans being one of those things. It is apparent that women in developing countries are empowered by micro-loans. Micro-loans are a small amount of money given to small businesses. Micro-loans help make women more independent and help them not rely on their husbands for money. It helps these women in poverty get their kids and themselves an education with the money they receive. Additionally, micro-loans make it possible for women starting a business, in order to make more money. There are many benefits for women receiving micro-loans.

For Victoria’s case, she needs the money to buy more potatoes and quinoa to make sure her shop has all the proper vegetables (Kiva.org). If Victoria can keep her shop well stocked, she may attract more customers and make more money. By earning more money, Victoria can improve her quality of life. According to Plan Canada “microfinancing can lead to improved access to clean water and better sanitation while also providing better access to health care” (plancanada.ca). Research shows that microfinance loans are better suited for women because they are less likely to miss payments on their loan and it helps them feel empowered (plancanada.ca). By lending to Victoria, she will feel empowered and will be able to support herself and her family. Also, because she is a woman, she is less likely to miss

Background: For years since the rise of microfinance in the contemporary discourse of development, Chotacredit, a nationwide Microfinance institution, has been playing a leading role in the XXX region in providing accessible finance to low-income households as a catalyst for employment creation, poverty reduction, and gender equality. However, in recent practice, Chotacredit has found that the current loan-signing rule which requires co-signature by spouse may potentially limit female participation in the microloan program and program impact. A few valid assumptions have been made: 1. As currently, a loan contract must be co-signed by both husband and wife, and a significant share of the husbands of our female clients are truck drivers, the

Poverty has been a worldwide problem since bartering first began. Some people would have than others. They are considered wealthier and this causes conflicts and class divides. After bartering, the idea of money was implemented. Poverty continued to thrive through this new system and it continues to be a problem today, so much that countries are classed based on their wealth.

The problem with the current state of micro-banks and credit card companies is the amount of the fees and interest charges they are charging, usually to consumers who are poor and low wage earners, who desperately seek out these alternatives to take care of their financial needs. These practices leave them in a more desperate state because the extortionate fees, making it impossible to stay current on their payments, by driving disadvantage consumers in deeper debt. Some of these companies charge high percentage rates, and being late on

According to the World Bank, the poor are those whose income is under the international poverty line, USD1.90/day. Aside from that statistical explanation, though, this essay focuses on the more interesting descriptive explanation of poverty. It explains that poverty should also be defined by the poor people’s lack of assets and difficulties of accesses including the access to high-paid employment, goods, and services which their livelihood is based upon (Ghosh, 2011). Poverty alleviation programs are mainly divided into cash and non-cash approaches which commonly aim to enhance poor societies’ capacity to increase their well-being, social security and stability. Even though both seem to have common objectives, their approaches for alleviating poverty are quite different.

Gobezie, (2004) and Cull, et al (2007) estimate high rate of return to invested capital for those with low capital and who are facing capital constraints. Accordingly, poor households would still have a sufficient income even with high effective interest rates. Goldstein, & Udry, (1999) and Bidwell, (2009), found similar results for small scale farmers. While on the contrary, many studies observed clear evidence for the sensitivity of the demand for microcredit to interest rate greater than wealthier borrowers (Dehejia et al. 2005, Annim, 2011 and Karlan, & Zinman 2008).

For example, some women use their microloans to create a family business based on local crafts. It is said that that “for every 100 taka lent to a woman, household consumption increases by 18 taka; interestingly the figure is 11 taka if the same amount was lent to a man”(Amin, Rai, and Topa). Although critics argue that loaning to women is not a shortcut to gender-equality, it is undeniably a step in the right direction. Some studies say that only 45% of loans given to women stay solely in women`s hands; yet, studies indicate that the very act of receiving a loan allows a woman to have more say in the household which, in turn, leads to the furthering of education and sanitation (mircoCredit). This supports the idea that loaning to women is not merely an investment in an individual, but an investment in a family. For example, Runi Mamun, of rural Nowapara, Bangladesh, uses her microloans to help the family. With only $1,000 worth of loans, she has started a jamdani (decorative sari) weaving business, which employees her family members, and bought a cow. On a more personal note, her newfound economic independence has earned her respect in her community. She plans not to marry unless her suitor is as financially stable as she (Burns). This ideology is a drastic departure from the male-dominated ideologies that pervade these rural, impoverished areas. In addition, the Grameen Kaylan

Maurya (2011) perfectly summarised the concepts of adverse selection and group lending. In essence, microfinance works on a joint liability model and the traditional theories of credit lending state that rural credit markets are imperfectly competitive and acquiring information about borrower types on who is risky and who is safe is not costless. This market imperfection leads to high interest rates and drives out safe borrowers from the credit market. In economic literature, this problem is considered as adverse selection problem and the joint liability model tries to solve the problem of adverse selection through group lending (Maurya, 2011).

From a structural perspective, however, the potential for growth across most microfinance markets is vast as financial exclusion remains widespread. In spite of the rate of financial inclusion progressing rapidly in the last decade, a large gap is observed between developing and developed countries. For instance, while the ratio of 1 Adams, T. (2016). Banks are driving financial inclusion. Livemint. Retrieved from http://www.livemint.com/Opinion/ qOHHqoPRYbjkywASoqeQ0K/Banks-are-driving-financial-inclusion.html (accessed on 09/11/2016) 2 World Bank. (2016). Financial inclusion – Overview. Retrieved from http://www.worldbank.org/en/topic/financialinclusion/ overview (accessed on 09/11/2016) 3 responsAbility (2016). Microfinance market outlook: Developments, forecasts, trends. Retrieved from http://sanabelnetwork.org/UserFiles/file/Conf%20publications/rA_Microfinance%20Outlook_2016.pdf private credit to GDP in countries with large microfinance markets (developing and underdeveloped countries) hovers at around 40%, in developed countries, this indicator lies well above 100%.3 This gap implies that the microfinance sector still has plenty of room to ‘catch up’, allowing it to outpace growth levels in more mature segments of the economy for the foreseeable future. However, this is not true of all microfinance markets. In some countries—for instance, Peru—financial markets have expanded at

This critical analysis is done on the journal study titled "Microcredit in Rural Bangladesh: Is It Reaching the Poorest?" which was published by the Journal of ESR. The analysis based on the aim of understanding the why the microcredit programs reached rarely to the poor in rural Bangladesh. They found five reasons behind this: supply, demand, NGDO 's norms and social issues, sustainable financial services and voluntary and non-voluntary dropouts. This paper also argues that microcredit is the not best way to help the poor. This paper used two kinds of primary data of source, firstly they conducted the study in 1999 by World Bank as a part of the study titled "Voices of the Poor". It was organized in 8 rural and 2 urban cities of Bangladesh. (Nabi et. al., 1999) and the second study done in 2 rural and 5 urban cities of Bangladesh from 1999 to 2000 and the title was "Listening to the Poor". They utilized a different method for finding a result of not reaching microcredit facilities to poorest of the poor. This

Microfinance are the financial institutions who provide loans or funds to individuals who do not possess the actual documents which can be submitted to banks to seek/borrow loans. These individuals can be entrepreneurs and small scale business owners. Microfinance institutions mostly function in developing countries when compared to developed countries. They are almost similar to banks with regards to the nature of functioning, for instance, they fund people who would like to start a poultry business (farmers), transportation and restaurants.

The idea of microfinance business was pioneered in 1970s by Prof. Yunus in Bangladesh, later on followed by countries such as Bolivia, Indonesia and others. The idea was to setup a financial inclusion system which can benefit the poor and to prove that the poor can be creditworthy and can run productive microenterprises if adequate and applicable system is designed (Callaghan et al. 2007). As a result, microfinance innovation spread to different countries in the world and strongly targeted as tool of poverty alleviation and development priority to empower the poor. The industry has registered a tremendous growth since its emancipation, now it is an industry of more than 10,000 microfinance institutions which mobilize around US$70 billion assets and serves about 150 million customers around the world (Augustine, 2012).