Economics of Microfinance, second edition / Edition 2|Paperback (2024)

FAQs

What are the disadvantages of micro credit? ›

Cons of Microcredit

There are some cons regarding microcredit, including too much pressure to repay loans, a large suicide rate among borrowers, and severe debt levels.

The main goal of microfinance is to alleviate poverty in the population through credit provision and carrying out financial training while banks focus more on profitability and growth. Microfinance loans are of lower interest rates and better repayment terms while bank loans are of comparatively higher interest rates.

Microcredit refers specifically to the practice of providing small loans to individuals or groups who may not have access to traditional banking services, while microfinance encompasses a wider range of financial services, including savings and insurance.

The problem is that the borrowers may not have a steady income source, or they plan to use the microcredit to create an income source for themselves that would allow them to pay back the financing.

Pros and Cons of Microfinance

It also provides education. Finally, microfinance can encourage entrepreneurial activity and business development in poverty-stricken areas. Some downsides of microfinance include claims that it can take advantage of those in tough economic situations, a situation similar to loan sharks.

Microfinance is a type of banking that provides financial services to low income individuals or groups of people who would otherwise have no access to finance. Microfinance includes the full provision of training and support from microfinance institutions (MFIs). This is usually why repayment rates are so high.

Microfinance refers to the financial services provided to low-income individuals or groups who are typically excluded from traditional banking. Most microfinance institutions focus on offering credit in the form of small working capital loans, sometimes called microloans or microcredit.

Information available on the CBN website shows that there are about 916 licensed microfinance banks in Nigeria. These banks provide essential financial services (such as savings, lending, domestic fund transfers, etc.) to low-income earners, the unbanked and under-served groups like market women and unemployed youths.

microcredit, a means of extending credit, usually in the form of small loans with no collateral, to nontraditional borrowers such as the poor in rural or undeveloped areas.

Is microfinance still a thing? ›

For many Americans, if they've heard of microfinance at all, it's because they or a friend or family member have lent through the platform. As of 2023, according to a Kiva spokesperson, 2.4 million people from more than 190 countries have done so, ultimately reaching more than 5 million borrowers in 95 countries.

Fintech and microfinance research

Microfinance describes financial services to those who lack access to traditional banking services, such as small businesses. Financial technologies (FinTech) refers to the technologies used in the financial sector – typically by financial institutions.

Microfinance isn't perfect, and many of the concerns voiced about the industry are legitimate. It is, however, one of the more effective tools the world has for improving financial inclusion, which in turn can help to bring people out of poverty and assist in reaching the UN's Sustainable Development Goals.

In fact, Jason Hickel of the London School of Economics points out that in South Africa, microfinance has failed because 94% of the loans people recieve are used to pay for basic needs rather than generating a profit to pay off the loans and sustain themselves.

Microfinance services are provided to unemployed or low-income individuals because most people trapped in poverty, or who have limited financial resources, don't have enough income to do business with traditional financial institutions.

Credit risk is one of the most significant risks faced by microfinance banks. Effective credit risk management involves assessing the creditworthiness of borrowers, setting appropriate interest rates, and implementing collection strategies to minimize defaults.

Using credit also has some disadvantages. Credit almost always costs money. You have to decide if the item is worth the extra expense of interest paid, the rate of interest and possible fees. It can become a habit and encourages overspending.

Some impact/evaluation studies have found that access to credit by the poor has a large positive effect on living standards. However, other studies have found that poverty is not reduced through micro-credit – poor house- holds simply become poorer through the additional burden of debt.