Access to credit and micro creditSyllabus: With reference to a specific developing economy, and using appropriate diagrams where relevant, examine how the following factors contribute to economic development:
To break the poverty cycle, those in poverty must find ways of generating income to allow them to save. Traditionally, borrowing from banks to kick-start small businesses has not been possible, because commercial banks have been reluctant to lend to the poor who are seen as 'high risk'. However, new institutions and technologies are creating innovative solutions to allow the poor to obtain credit
Microcredit schemes are schemes that lend small amounts to the poor in a developing country. The loans may be as low as $1, but they are directly targeted at the needs of those people and reflect the circumstances in which they operate. These loans are often offered by Non-Governmental Organisations (NGO's) as the commercial financial institutions are not prepared to work in this way. They generally regard the poor as high risk, as they cannot offer any security for the loans.
Many economists argue that these loans are an excellent way to promote growth and development, as they are directly targeted at the people who need them the most, and help to promote an entrepreneurial culture from the 'bottom-up'. However, whether they are sufficient to boost an economy significantly is very debatable and they are likely to be most effective when combined with other development strategies, especially entrepreneur and business training.
With the advent of mobile phone technology, mobile phone banking has become increasingly important. Whereas in many less developed countries the inhabitants do not have bank accounts they do have a mobile phone. New businesses are starting to realise the potential for using such technologies to access and transfer money which offers a powerful driver for commerce and economic and social development.
Breaking the vicious cycle of poverty is clearly a major development goal. One way to do this is to provide opportunities for those that are economically inactive to become income earners and savers.
Note the command word EXAMINE included in the Syllabus statement so a Data Response Qd could be about this
Q3d Using information from the text/data and your knowledge of economics, evaluate the use of micro-credit in promoting economic development in economically less-developed countries. [8 Marks]