Banks Making Big Profits From Tiny Loans
1.Explain how a microcredit system works.
Microcredit systems are the extension of small loans to poor borrowers. They exist to spur entrepreneurship, increase incomes, and alleviate poverty, which in the end is aimed to encourage economic growth and development.
2. Examine the benefits of using microcredit systems in developing countries to promote economic development.
Microcredit systems will lead to empowering women, which will eventually lead to economic development. If women gain more status that means that there will be more efficiency as women and men will both be involved in the labor force. In addition, microcredit systems will allow for entrepreneurship, which will decrease unemployment, as more jobs will be available for poor people. This will result in both efficiency and productivity within the economy as the labor force has increased.
3. Examine the problems associated with operating microcredit systems and whether these could contribute to a worsening in the levels of poverty.
A problem that is associated with operating microcredit systems are several. One problem involves the debt that may occur due to high interest rates. Usually, microloans are distributed by NGO’s or subsidizing of the government who keep interest rates low, but in few cases there are times when the banks provide it. Because banks are interested in profit, they make the interest rates high, and people aren’t able to pay it back. This results in a larger income distribution. In addition, if the banks are providing microloans, they usually will not give it out to all poor people, but to people who are somewhat poor (people who have a shelter). This is because they want to reduce the risk of them not getting their interest rates back, as severely poor people will most likely not be able to pay them back.