One of the key reasons that developing economies remain poor is the actual fact that they cannot have access to credit. This is because of the insufficient collateral that poor have or because the monitoring cost of the banks is too much so lending in such groups is not profitable for the banks. Therefore poor don't have usage of the loans from the bank operating system. However since the late 1970s a revolutionary change occurred and the indegent in the developing economies began to get access to small loans. These loans are called microcredit programmes. The first that established them was in 1976, Mohammad Yunus the founder of Grameen Bank in Bangladesh. Also Mohammad Yunus received the Nobel peace prize in 2006 because of the aspect that microcredit helps visitors to move away from poverty. There is not only Grameen Bank, in fact a great many other followed Mohammad's example and there are nowadays many institutes around the world offering microcredit loans to the indegent. Some well-known examples are, Bank Rakyat in Indonesia, Banco Sol in Bolivia and many others that serve the same goal. Too have a better view about the amount of individuals that leave in extreme poverty in 2002 according to US this amount was the one fifth of the world population (1. 3 billion people), plus they agreed to an idea of halving the above mentioned amount into half by 2015. (Hermes and Lensink, 2007)
So apparently there are many people that may use a help from microcredit, this is the key reason why there is such a growing attention from the policy makers and from the academics. A couple of two main debates one of the academics, one of them is the search of how and why microcredit works from theoretical prospective. The next biggest debate is about the trade-off that might exist between sustainability of the bank providing the loans and the outreach of the microcredit programmes. There will exist benefits and drawbacks of microcredit as in every aspect and we'll try to identify and discuss both of them in the upcoming sections.
Benefits of Micro-Credit
There are three types of borrowers, the first one are the individual borrowers, the second one are the group borrowers and the third one are the village banks. Each one of the have different kinds of liabilities and the bank or institute that lend them have different kinds of risk so expectations to get their money back and also different interest levels.
First we begins with group lending because it is the most frequent way that microcredit borrowers can get access to loans. According to (Lapenu and Zeller, 2001) only the 16% of microcredit programmes use the group lending mechanism so poor have access to credit, but they found out that there where the two thirds of the borrowers that where included in their survey. The group lending programmes are groups of customers that are self-formed and they have a jointly liability to repay the loan that was presented with to the group members. Thus if one member fails to repay the loan then the other members have to contribute. Also it will mean that group members will be denied any future requests for extra loans. Thus group lending creates high incentives for the individual group members to monitor all of those other members of the group so they will reduce the potential risk of contributing in a potential failure of even worst lose the access to future microcredit loans. So with this way of lending agency cost of the lending company is reduced to the very least or even vanish it, because the procedure now takes place among the list of borrowers. Also group lending structure is situated to the fact that groups are formed by individuals who live close someone to each other and might have social ties so they may be much better informed about each other's activities plus they can assess the risk better than the lender that cannot have admission too such in depth information. There are some controversial evidence that if relatives for the group then the repayment is not so secure and other state that as more powerful the ties are the better it is to repay the loan. Another essential aspect that helps the repayment security is that if there are written down procedures that they need to follow therefore the loan is repaid then moral hazard is reduced. Also a leader in the group is very helpful to be sure that everyone will repay their part of the loan and keep monitoring their activities to make certain that they will repay, so that as better the first choice quality the better the monitoring and the enforcement within a group.
The second kind of borrowers is the average person ones. They may have two-sided relationship with the institute as normal lenders do. The liability for repaying the loan stands combined with the individual borrower only, in some instances a guarantor might be needed but those cases are rare. In other cases that the borrower owns a small land it might be used as collateral but as a result of undeniable fact that the borrowers are poor it isn't a typical procedure. In individual borrowing the monitoring cost is high but from studies in Bangladesh sawn that each lenders have the best average profit for the lender. One reason for that is that individuals find the group methods become unwieldy for the individuals that searching for larger loans so they'll be able to invest in larger businesses. (Cull et al, 2007)
The third kind of borrowers is the village banks. They are simply kind of the branch of the bank, they form a large group and has a degree of self-governance. Sometimes village bank can be held by an individual that is wealthier that others so he can borrow from the institute and then lend the amounts to all of those other people. Most the clients of village banks are women as well as the amounts that village bank lend are small.
No you can deny that micro-credit is beneficial for the participants and also for the non-financial active people. Many can argue that it might not be available for everyone but even so the entire effects are positive for everyone. In Bangladesh it was found (Khandker, 2005) that microcredit had a big positive impact on the welfare of the households that used this type of borrowing and consumption was raised on the list of participants. And yes it was discovered that there was a spill over effect that was helping even the non-participants to have some benefits. Another factor is the fact that because the borrowing households where able to perform better in their businesses these were upgrading their living facilities to raised standards, proper shower, better bathroom fixtures and even plan to send their children to school or college.
The downside is that microcredit programmes and institutes almost all of the days cannot self-fund the loans so the majority of them are not sustainable. They depend a lot in donation and to Governmental subsidies. This is because of the high costs of monitoring these loans need to have. So as long as there are not sustainable they need to try and make more profit from the loans, this implies higher interest levels. It might not affect a whole lot the entire demand but after a certain point the demand on such high rates of interest drop dramatically. This is where microcredit institutes have to discover a balance therefore the following disadvantages have minimal impact at it's possible.
Drawbacks of Micro-Credit
Because to the fact that microcredit institutes have to make use of Government subsidies or donations to have the ability to remain sustainable and because of the worldwide economic crisis that reduces the amount of funds that exist. So to be able to become self-sustainable institutes have to improve the interest levels of the loans that they provide away. Here's where problems commence to occur, because as the interest rates getting higher the quality of the portfolio will drop and also the threat of moral hazard will rise. Also as a result of low credit limits of the group based methods institutes will have to get more individuals as clients and there is where information problems will occur because the institutes must self-monitor the individuals. Researchers (Cull et al, 2007) discovered that as interest raises the more profitable financing gets but up to a certain level, after 60% interest per year the profitability is not increasing ever again and this is because of the low demand due to very high interest. This sifts created a puzzle, why the average person approach is favoured from both group methods? This puzzle is sharpened by knowing that two of the pioneers of microcredit finance Grameen Bank of Bangladesh and BancoSol of Bolivia switched from group based model to individual based models nowadays. One aspect that justifies the above mentioned change is that each loans create more profit for their larger size and the higher interest rates that apply. If though we use loan size as a proxy of poverty then we will find out that the larger loans aren't applicable for the group borrowers and it must be a less poor borrower that is interested in buying larger businesses. From institute side possible the above change is essential to allow them to be self-sustain, but this comes to a contradiction with the key reason why those institutes created and their mission to begin with. They were made to support the indegent and present them access to funds and today they turning to more profitable loans that the majority of the time do not connect with the very poor borrowers which brings about a mission drift.
Mission drift is the task that occurs in the composition of new customers and the re-alignment from poorer to wealthier clients throughout the prevailing ones. Searching for cost-effectiveness institutes want to increase their loan size and which means that they need to focus on clients that seek larger size loans. Also the prevailing clients get slowly less poor than the actually where so the institutes now seem to be to lend wealthier clients that the methods they started with plus they were devoted to. Which means that institutes might shift focus to wealthier clients and that will affect the outreach to the poorest that are those ones that at first microcredit institutes designed for.
Some more disadvantages are that many institutes do not arrange meetings with the groups so they can guide them in what way they can get the better use with their loan, occasionally those meetings helped quite definitely to have the group focused and achieve grater wealth improvement than if indeed they didn't have the rules, as well as though there are constrains on the contract about how precisely the money need to be distribute among business investment and self-purchases. So every institute has to do so if they wish truly to fight poverty than just have a return on their money invested.
Another drawback as it was found (Nguyen and Hollister, 2012) is the increased bureaucracy in the load administration that escalates the cost as well as the time a loan needs so that it gets approved. Also they discovered that the credit limit especially on the list of group members is suprisingly low so it helps a little but it is no sufficient for you to definitely choose business and have the appropriate returns. This means that more time is required to be able to enhance their living standards and be less poor than thy formerly where.
Even if the drawbacks sound very serious and they're grate conditions that they have to be solved no person can deny that micro-credit continues to lessen poverty between the poor borrowers and improve the local economy, even though this happens in a lower paste nowadays. Since the late 1970s micro-credit is best & most sufficient way to fight poverty and offer better living standards for billion of individuals in the developing countries. One grate aspect that has to be noted is the fact that even if someone is not taking part in a micro-credit program by the end he/she will be benefited from others that took part in these programmes. So the overall living standards and consumption will be improved for both participants and nonparticipants which is due to the general increase of the neighborhood community income. Studies sawn that each year the common village poverty level is reduced by 1 %, it is not a large number but in some cases the percentage is higher. Also we must remember that even such few make huge changes if we consider the billion of folks that involves.
So it is vital that micro-credit institutes continue doing their finest to provide as many loans as it can be to the extreme poor and poor people around the globe because it was been proved that their way works perfectly in fighting poverty. So that as the saying goes it is best to teach someone how to catch fish than give him the fish, because this could keep on providing him food for a long time after years.
Still studies have to be made to determine the amount of impact of micro-credit institutes regarding poverty reduction, but it is not easy to compare all of this cases and come out with a result, and access al the socio political aspect of micro-credit. So long as micro-credit movement helps people escape from poverty and also have more chances to live on a much better life then it has to keep on going.
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