MACFIS Microfinance Talk
Later yesterday I went for a talk organised by MACFIS, it's about microfinance. I think that the talk was part of their whole trip to Grameen Bank in Bangladesh this September which at the moment, I have no intention of joining, but nevertheless, having formally studied development economics this year, I decided to go for the talk, just to see what new things about the field I might be able to pick up. Honestly though, there was supposed to be another talk given by my macro lecturer in UCL at 5pm about the relevance of maro researches with the real-world scenario, hence it quite a dilemma for me to choose which talk to listen to.
So, about the talk. Overall the talk was pretty brief but direct to the point. It all began with a presentation from MERCY Malaysia, an NGO which more or less functions like the Red Cross or something like that. The lady invited us, students to actively participate in their cause, helping people all around the world. In a way this was some sort of an eye-opener session for the audience on how others around the world might be living a less fortunate life than we do before the floor is indulged with one of the practical solutions which are effectively working out there, microfinance.
The session was then followed by a presentation by Five Talents, a Christian microfinance charity organisation. He began by explaining the background of the issue, which was the financial exclusion faced by poor people, how the closest financial institutions/banks can sometimes be too far away for them hence causing a problem of inaccessibility. Even if such services are being made available within a suitable distance from them, they might still not be able to utilize them for their own benefits since they have insufficient physical collateral to be used to take up the loans, not to mention the presence of sky-high interest rates further squeezes the life out of them.
So the idea of microfinance is to provide an alternative to conventional financing to these poor people in the hope that by doing so, we are able to lift them out of the so called poverty trap. A very noble idea. One of the main tools of microfinance is micro-credits. The key thing which makes micro-loans so successful is because the borrowers are bounded via joint liability. Joint liability lending institutions rely heavily upon social cohesion as well as the dynamic incentives as a means to enhance their effectiveness in combating poverty. The basic idea is that five people will form a group and take up the loans together. They will each co-sign the loans, then when the time is up, if say one of them fails to repay his loans, then the whole group will be denied of a new loan for the next period. It is in a way a punishment game, but because the responsibility of repaying the loans are now being split between the five members of the group, they will each have an incentive to ensure that the other will be able to meet the repayment deadline or else they will all pay the price.
But there are some downsides to this model too, because the loans are small and the repayment period is too short, then it is difficult for poor people to utilize it to scale up their businesses. But then again, the original goal is to get them out of poverty that once they are out, they are assumed to be able to take up a bigger sized loan to do so from a conventional bank/financial institutions.
So there you have it, a brief description of how microfinance or in particular, micro-credit works. A very interesting field to look at, if you ask me. I am just grateful that I am able to study this here in UCL, at least I know how the knowledge of economics is useful for other than making fiscal/monetary policies.
I leave the rest to you.......
So, about the talk. Overall the talk was pretty brief but direct to the point. It all began with a presentation from MERCY Malaysia, an NGO which more or less functions like the Red Cross or something like that. The lady invited us, students to actively participate in their cause, helping people all around the world. In a way this was some sort of an eye-opener session for the audience on how others around the world might be living a less fortunate life than we do before the floor is indulged with one of the practical solutions which are effectively working out there, microfinance.
The session was then followed by a presentation by Five Talents, a Christian microfinance charity organisation. He began by explaining the background of the issue, which was the financial exclusion faced by poor people, how the closest financial institutions/banks can sometimes be too far away for them hence causing a problem of inaccessibility. Even if such services are being made available within a suitable distance from them, they might still not be able to utilize them for their own benefits since they have insufficient physical collateral to be used to take up the loans, not to mention the presence of sky-high interest rates further squeezes the life out of them.
So the idea of microfinance is to provide an alternative to conventional financing to these poor people in the hope that by doing so, we are able to lift them out of the so called poverty trap. A very noble idea. One of the main tools of microfinance is micro-credits. The key thing which makes micro-loans so successful is because the borrowers are bounded via joint liability. Joint liability lending institutions rely heavily upon social cohesion as well as the dynamic incentives as a means to enhance their effectiveness in combating poverty. The basic idea is that five people will form a group and take up the loans together. They will each co-sign the loans, then when the time is up, if say one of them fails to repay his loans, then the whole group will be denied of a new loan for the next period. It is in a way a punishment game, but because the responsibility of repaying the loans are now being split between the five members of the group, they will each have an incentive to ensure that the other will be able to meet the repayment deadline or else they will all pay the price.
But there are some downsides to this model too, because the loans are small and the repayment period is too short, then it is difficult for poor people to utilize it to scale up their businesses. But then again, the original goal is to get them out of poverty that once they are out, they are assumed to be able to take up a bigger sized loan to do so from a conventional bank/financial institutions.
So there you have it, a brief description of how microfinance or in particular, micro-credit works. A very interesting field to look at, if you ask me. I am just grateful that I am able to study this here in UCL, at least I know how the knowledge of economics is useful for other than making fiscal/monetary policies.
I leave the rest to you.......
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