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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
charities

Micro-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
(insurance
)

Sustainabl
e finance
for new
enterprises

Gender
empowerment

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 rate
Grameen 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 Action
The 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, accounti
ng 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

• Sustainable savings more important in long run Saving real incomes need to rise
• Credit just one factor in lifting income or output

s

Cash

Invest

• Esther Duflo - direct cash transfers and better
funding of skills training have bigger effect
• 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
Risktaking
behaviou
r

Safety net will
envourage less
risk averse
behaviour

Schoolin
g, Death
and
Saving

More children
from poorer
families will be
able to continue
their education

Insurance can be
a spring-board as
well as a safety
net

Many of the
poorest spend
large sums of
funerals insurance reduces
this burden

Insurance can
help smooth
volatility in income
and spending

Life insurance
schemes promote
small scale 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.
Follow Up Videos
Follow Up Videos
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Micro Finance and Economic Development

  • 1. Micro Finance and Economic Development A2 Macroeconomics, Autumn 2013
  • 2. Basics of Micro Finance Micro-credit - provision of small-scale loans to the poor Micro-savings – for example, voluntary local savings organisations provided by charities Micro-insurance- especially for people and businesses not traditionally served by commercial insurance businesses Remittance management – e.g. transfer payments made through mobile phone solutions
  • 3. Aims of Micro Finance Poverty reduction (the original aim) through financial inclusion Raising domestic savings in lowest income countries Protection against income volatility (insurance ) Sustainabl e finance for new enterprises Gender empowerment Microfinance has long been used in developing countries to help poor entrepreneurs who cannot access mainstream finance
  • 4. 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.
  • 5. 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 rate Grameen 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
  • 7. Micro Finance in Action The 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, accounti ng for the vast majority of deaths of children under five.
  • 8. 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
  • 9. Critics of Micro Finance Debt • Sub-prime style lending, charged high rates of interest • Coercive collection practices by some lenders • Sustainable savings more important in long run Saving real incomes need to rise • Credit just one factor in lifting income or output s Cash Invest • Esther Duflo - direct cash transfers and better funding of skills training have bigger effect • Credit is often used to finance consumption • Micro-finance cannot compensate for inadequate healthcare, education or infrastructure
  • 10. 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
  • 11. Micro Insurance Risktaking behaviou r Safety net will envourage less risk averse behaviour Schoolin g, Death and Saving More children from poorer families will be able to continue their education Insurance can be a spring-board as well as a safety net Many of the poorest spend large sums of funerals insurance reduces this burden Insurance can help smooth volatility in income and spending Life insurance schemes promote small scale saving
  • 12. 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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