Microfinance aims to provide financial services to the poor and extreme poor, including microloans, savings, insurance, and remittances. It aims to reduce poverty through financial inclusion and empowerment. Professor Muhammad Yunus founded Grameen Bank in Bangladesh, which pioneered microcredit and saw rapid early growth. However, microfinance also faces criticisms like over-indebtedness, limited poverty reduction, and reliance on subsidies. Fair trade aims to promote equitable trading conditions for marginalized producers and workers through minimum prices, social premiums, and standards. However, it remains a small niche and critics argue it is not a long-term development solution on its own.

1. Micro Finance, Fair Trade
and Development
Tutor2u, A2 Macroeconomics (EdExcel Unit 4
and IB Economics)
Autumn 2012

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
Sustainabl
Extreme Raising Protection e finance
poverty domestic against for new
enterprises Gender
reduction savings in income
empower-
through lowest volatility - Route out ment
financial income (insurance of
inclusion countries ) dependenc
y

4. Professor Muhammad Yunus
 Grameen - "Bank of
the Villages“ in
Bengali
 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
 "Poverty is a common
experience
everywhere- what we
are addressing is
rejection by the
financial system."

5. The rapid (early) growth of
Grameen

6. Critics of Micro Credit / Grameen
• Multiple loans – growing evidence of sub-prime style
lending, charged very high rates of interest
• Coercive collection practices by some lenders
Debt • Limited evidence of the impact of micro loans on poverty reduction
• Sustainable savings more important in long run - real incomes need
to rise
• Duflo argues that direct cash transfers / funding of skills training
Savings have a bigger effect in raising sustainable incomes
• Grameen has been reliant on subsidised funding to be successful
• Their funding model limits the scalability of micro credit
• Credit is often used to finance consumption rather than investment
• Investing in people a stronger pathway out of poverty than extra
Subsidy debt

7. Grameen comes to Scotland

8. Micro Insurance
 Examples of micro-insurance include:
◦ An Indian fertiliser company providing free
insurance with each bag of fertiliser bought
◦ Cattle insurance policies – small scale insurance
policies that cover the death of animals due to
accident, disease, foods, drought and other
events
◦ Life insurance and accident cover bundled with
farmers or other business people buying new
trucks
◦ Pay-as-you-plant insurance for Kenyan farmers
to insure inputs against drought and excess rain
◦ In South Africa, HIV patients can get life
insurance providing they sign up to regular
medical check-ups and adherence to taking

9. Micro Insurance
Risk- Schoolin
taking g, Death
behaviou and More children
Safety net will
r encourage less Saving from poorer
families will be
risk averse
able to continue
behaviour
their education
Many of the
Insurance can be poorest spend
a spring-board as large sums of
well as a safety funerals -
net insurance reduces
this burden
Insurance can
Life insurance
help smooth
schemes promote
volatility in income
small scale saving
and spending

10. Leapfrog Investments

11. Andy Kuper – Leapfrog
Investments
 Kuper founded
LeapFrog in 2007 to
provide insurance for
"millions of people who
lie awake at night
fearing they will lose
everything in the event
of a fire or flood or other
adverse event".

12. Limits / Risks from Micro Finance
Moral hazard
Adverse selection
Asymmetric
information

13. Moral Hazard
Moral hazard
Insured people and businesses
may take less steps to protect
themselves against risks
because they know they have
the safety net of insurance

14. Adverse Selection
Adverse selection
The highest risk agents will
tend to be those who bid for
insurance products
increasing the pooled risks of
insurance everyone

15. Limits / Risks from Micro Finance
Asymmetric information
Those seeking insurance
have more information about
their conditions than agents
selling the insurance

16. Fair Trade
508 licensed companies in the UK including
Morrisons, Asda, Starbucks, Unilever and Marks
& Spencer, offering 4,500 products.

17. Free Trade and Fair Trade
 Free Trade  Fair Trade
 Free trade gives  Fair access to the
primacy to market markets of the
forces and involves developed world
the harmonization of  Fairer (more
trading rules and equitable) prices for
the reduction of developing country
barriers to trade producers /
such as tariffs and processors
quotas.  A particular
relationship with
ethical consumers

18. The basis behind Fair Trade
A trading partnership that seeks
greater equity in international trade.
It contributes to sustainable
development by offering better trading
conditions to, and securing the rights
of, marginalised producers and
workers.
.

19. Fair Trade Purchasing

20. The basic fair trade concept
 Traders pay producers an agreed
minimum price that covers the costs of
sustainable production and living; this
gives way to the market price
whenever the latter is above this
minimum

21. Coffee Supply Chain

22. Coffee Prices and Fair Trade
Guarantee for Producers

23. Cocoa Prices
Cocoa growers typically receive around 6 per cent of the final
price of chocolate paid by consumers

24. Building the Case for Fair
Trade
 An alternative to the world trading system
 Enables the producer (farmer) to obtain a larger
share of the final consumer price
 Guaranteed prices are a form of insurance
 Fairtrade offers a social premium price – helps to
fund reinvestment in production
facilities, training, sanitation
 Tied to enforcement of better labour conditions e.g.
Child labour + environmental standards
 Fairtrade purchasers provide micro-credit to growers
 Important counter balance to monopsony power of
multinational businesses
 Long term contracts help to reduce uncertainty
 A complement to, not a substitute to demands for /
pressure to reform global trade system

25. Black Gold – Fair Trade
Coffee

26. Joining the Fair Trade
Movement
 Procter & Gamble,
 Nestlé Kraft, Sara Lee
 Chiquita, Del Monte, Dole
 Ben and Jerry’s
 Cadbury, Candico Sugar
 Starbucks and Costa
 Co-Operative, Marks and
Spencer, Sainsbury’s

27. Critics of the Fair Trade
Movement
 It is a “niche” second best alternative to aid
 Not a long-term development strategy
 Most fair trade farmers continue to sell majority
of their output into conventional markets
 Higher guaranteed prices might encourage over-
production rather than diversification
 Costs imposed by Fair Trade certification are
substantial for lowest income farmers
 Fair trade penetration is greater in middle-income
than in poor countries (e.g. Mexico)
 Primary product producers would gain more by
investing in speciality brands (higher value
added)
 What % of the retail price goes to farmers?
 Price guarantees not the same as income

28. Adam Smith Institute
 “Fairtrade is not the only
way to make a
difference, and it is not
the best way either”
 “It holds back
development, paying
inefficient cooperative
farms and discouraging
diversification and
mechanisation.”
 “At best, fair trade is a
marketing device that
does the poor little
good.”