2. Microfinance
• Microfinance is a term that refers to small
scale financial services (i.e., loans and/or
savings accounts) to poor clients who might
not otherwise have access to these services.
– Microcredit: small loans to low income clients.
– Microsaving: small deposit accounts for low
income clients.
3. Microcredit
• Why don’t traditional banks provide these
services in the developing world?
– Loans are costly: it cost roughly the same amount
to administer a small “microloan” as it does for a
larger, more profitable loan.
– The poor lack collateral.
• No land, no valuable property, no credit ratings.
4. Microcredit – Grameen Bank
• Bangladesh economist Muhammad Yunus
founded the Grameen Bank in 1983.
• The idea of microlending developed from the
idea that the poor have skills that are
underutilized due to credit constraints.
• Yunus won the Nobel Peace Prize in 2006 for
his work in microfinance.
5. Microcredit – Grameen Bank
• How to circumvent credit constraints for the
poor:
– Loan primarily to women
• Women have a higher repayment rate and tend to
accept smaller (and therefore less risky) loans than
men.
– Group lending
• Group lending stems from economies of scale,
spreading the risk and costs across many borrowers.
6. Microcredit – Criticism
• EXTREMELY high interest rates
• Group members are often stuck repaying
other members’ delinquencies in order to be
able to borrow more, even if they’ve paid on
time and in full.
7. Microcredit – KIVA
• Kiva is not an microfinance institution
• Rather, the organization merges lenders in the
developed world with low income borrowers.
• KIVA website
• Uganda: A Little Goes a Long Way
– (YouTube Video)