Post 5 – Micro financing and Liberia

Micro finance is a financial service that includes credit, savings, insurance, money transfers, etc. that are targeted at low-income people who are either just above or below the poverty line. Most micro finance clients are self-employed entrepreneurs with household-based businesses that include small retail shops, street vending, and artisan manufacture and service provision.  Micro finance Institutions (MFIs) are institutions that arose because regular banking in poverty-stricken countries are very expensive. MFIs offer small ticket loans, deposits, insurance, investment and remittance. The size of loans range from (equivalent) $100 -$100, compared to banks that only offer (equivalent) $1000+ loans. The duration of the loan is up to 2 years, while banks are 6 months. Banks also have higher withdrawal fees. Though MFIs offer more products and have a bigger range of loan sizes, their interest rates are higher than regular banking, at 20-30%. With this information, the basic argument for and against micro-credit that Banerjee and Duflo make is that micro-credit is one way that can help the poor think in terms of the future with long-term goals and can start the process of exiting extreme poverty. screenshot-8Micro-credit allows them to take out small loans that can go towards their business or their household. But, micro-credit seems to plateau because most of these clients own very small businesses that make very little money. The average monthly profit for an owner of a small business is just enough to pay rent, but doesn’t take into account the operating expenses. Because their businesses are small, they cannot really expand because expansion means more expensive (employees, more stock, etc.); so many entrepreneurs don’t take advantage of micro finance loans because of this reason.  I agree that businesses are too small to turnover any sort of profit and expansion would mean that the poor are now in debt because they cannot repay the loan they took out, because they don’t make enough money. I also agree that micro-credit gives the poor a better outlook on the future, to an extent. I feel that even entrepreneurs in poor countries know that there is no way for them to escape poverty, maybe extreme poverty, but not poverty altogether. Another factor is the market, in this age there seems to be a business for any and every thing. Why would investors go to poorer countries for something they can find in richer countries? Because of these reasons, I think they live more in the moment and do not save and invest like we (richer countries) think they should.

screenshot-7Micro financing in different parts of poorer countries differs from region to region.  Micro financing, for example is different in Liberia than Ghana. Liberia has a commercial banking industry consisting of 9 banks, with 87 branches throughout the country. Different banks offer different services like Afriland First Bank offers agricultural loans, and Access Bank micro credits to micro, small and medium enterprises. There are fees and interest that are charged for services and transactions like deposits, withdrawals, checks, letters of credit, etc. Micro financing in Liberia seems to be going somewhat well, According to The Mix, borrowing from Access Bank went down from 18.37 in 2014 to 13.19 in 2015 and deposits went from 16.87 in 2014 to 20.44 in 2015. The number of depositors in 2015 was 122.31. For BRAC Liberia, a micro finance organization, active borrowers went up from 11.65 in 2014 to 14.03 in 2015, but deposit have stayed at 0.00 from 2013 to 2015 along with the number of depositors. Technology is somewhat changing banking in Liberia. Modern services and products in Liberia include ATMs, point of sale terminals, electronic fund transfer, and mobile money. But at the same time, ATMs are no connected to global electronic banking networks and mobile money is not widely uses. But, only time will tell if technology is effective in places like Liberia where technology is fairly new.



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