Candace WilliamsPPE Tutorial Paper: November 5, 2007Does microfinance lead to economic growth?Poverty and Access to Financial TechnologiesLack of access to credit markets is a major reason why many economies cannot develop. In LatinAmerica, over 360 million people lack access to basic financial institutions. Less than 10% of low-incomehouseholds around the world have savings accounts. Financial technologies like credit, investment,savings accounts, and insurance are important because they are a form of investment or they protectinvestments by managing risk. Investment plays a key role in development. In the Solow Growth Model,high levels of saving (investment per worker) lead to faster output growth in the short-run (countriesdiverge over time). Changes in the amount of capital per worker change how productive workers are an ineconomy. For example, Singapore had a 40% saving rate and 5-6% GDP growth from 1960 – 1996.During this same time period, Kenya had a 15% saving rate and GDP growth of about 1%.Usually, the lesser-developed economies do not have access to financial technologies because perspective borrowers lack collateral; institutions do not want to pay high monitoring, screening, and enforcementcosts; and because risks are very high in populations that suffer from severe illness, malnutrition, and lowlevels of education.Arguments for Microfinance: The Case of the Grameen Bank of BangladeshMicrofinance is a wide variety of economic interventions that aim to improve poor people’s access tofinancial technologies. The model of the Grameen (Village) Bank of Bangladesh is the most well-knownand discussed model in the literature. Muhammad Yunus, a Bangladeshi economist who founded theGrameen Bank in 1976, won the 2006 Nobel Peace Prize. As of 2007, the bank has 7.3 million membersin over 74,000 villages. Total assets are nearing $1 billion, the recovery rate is 98.4%, and profits are at$20 million. The distinguishing features of the Grameen model are joint liability, forced savings, and‘non-financial products’ that aim to change the social and economic infrastructure of Bangladesh.Joint liability turns the access of future access to loans into collateral and creates social capital. Membersare placed in groups of 5 – 8. A loan officer meets with the groups weekly and loans are disbursed on astaggered schedule over the course of a few months. Borrowers who have already paid off much of their loans as well as members who have not received loans have a large incentive to make sure that everyonein the group fulfills their obligations. Also, members automatically receive a larger loan upon repaymentof old debts. All members must save $0.02 per week – these funds can be borrowed against inemergencies and fund human capital projects like scholarships, school improvement funds, and sanitation projects. Other non-financial products include group education and discipline. For example, all membersmust learn how to sign their name; memorize resolutions that encourage small families and education, prohibit dowry and child marriage, and praise sanitation and cleanliness; and practice calisthenics.Members have to sit in straight rows, chant, and participate in support networks. Another importantelement is that 97% of the borrowers are women.Arguments Against Microfinance: A Deeper Look at GrameenStudies show that the Grameen program does not change consumption (Khandker 2004). The same studyalso found that Grameen was responsible for a 1.6% decrease in moderate poverty and 2.2% decrease inextreme poverty in the 1990s. This means that it is responsible for over 40% of the reduction in poverty
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I agree that microfinance alone, without a concerted effort by government to improve infrastructure and the macroeconomic environment, is ineffective. However, big business does not necessarily benefit the local economic environment. You must have fair labour laws, anti-pollution and environment protection laws, and laws demanding some reinvestment of profits in the country where the profits were made. Otherwise big business can be economically destructive, benefiting the rich and impoverishing the locals. But I like your paper; it's a good springboard for discussion! Thanks.
Obviously micro finance is very important for growth.