WTO: The Question of Microfinance in LEDCs Cambridge Model United Nations 2018

Transcription

1 Study Guide: The Question of Microfinance in LEDCs Committee: World Trade Organisation Topic: The Question of Microfinance in LEDC s Introduction: Micro financing has been used as a way of helping those in poverty have opportunities to start businesses and to develop their own means, so they can escape the poverty trap since the 1970s. Commercial financing services cannot provide for those in poverty because they are too much of a risk, with no collateral and no credit history; so micro financing is a way of bridging this gap and providing loans to poverty stricken populations. They are an effective way of not only helping the individual, but also improving the GDP and economic development of the nation as a whole. Key Terms: Microcredit- a type of banking service that is provided to unemployed or low-income individuals or groups who otherwise have no other access to financial services Microfinance - the broad spectrum of financial services such as loans, insurance, savings etc. provided to the people of low-income groups (living off less than $2 a day.) LEDC - less economically developed country. The life expectancy and GDP of these countries is low and they often lack certain things like clean water, sanitation, and health care. Microloan - loan from between $100 and $25,000 Microfinance institutions (MFIs) - organisations that help set-up microfinance schemes and offer microloans in LEDCs. Collateral - something pledged as security for repayment of a loan, to be forfeited in the event of a default. Capital - wealth in the form of money or other assets owned by a person or organisation or available for a purpose such as starting a company or investing. Poverty Trap - A spiraling mechanism that prevents people from escaping poverty because the economic system stops them from gaining enough capital to facilitate a growth in their 1

2 wealth. Contextual Information: More than three billion people - around half the world s population - live on less than two dollars a day. These people may attempt to save, borrow and acquire credit but they were struggle to do so from commercial companies or banks who demand serious collateral and credit ratings before granting a loan. Consequently many of these people are forced to borrow from loan sharks, who charge exorbitant interest rates and actually make their situation worse. This means that those born into poverty have limited ways of getting themselves out of it; although they may have the skills, ambition and drive to do so, their lack of capital prevents them developing new methods of generating income. These people cannot escape the poverty trap. Aid has been the traditional way of tackling the property trap. More developed countries providing facilities and funds to improve the situation of those in poverty. However, since the 1970s social innovators came up with microcredit as a way of aiding people in poverty to develop their own means of getting out. However, recently it has been understood that poor households need access to the full range of financial services to generate income, build assets, smooth consumption and manage risks. The microcredit model and been found to be too limiting and therefore microfinance has been developed as a broader, more all encompassing method of providing financial aid. Micro-financing organisations support a wide range of activities to help people in poverty gain opportunities to be granted loans and investment. These can include: 1. Education programmes to educate people in the skills needed to be a entrepreneur and learn basic principles of economy, such as budgeting and interest rates. 2. A microloan is granted to an individual by a loan officer, who help borrowers applications and oversees the process. The loan will have specific repayment plans and often require the recipient placing money in a savings account as insurance, in case of default. 3. A microloan may be granted to a pool of borrowers, if independently they do not have enough collateral. This means the individuals receive their loans, and must repay their debts together; the idea is that peer pressure and support will ensure each person pays their debts on time. This can allow people to gain a good credit history for future loans. 4. Providing financial facilities in which people can save money and gain interest. 2

3 5. Insurance schemes etc. WTO: The Question of Microfinance in LEDCs Microfinance has a good reputation; it is a positive form of aid and often has a longer lasting legacy. Although the borrowers qualify as very poor repayment of loans is far higher than conventional forms of financing: In 2016 the micro financing institution Opportunity International reported repayment rates of approximately 98.9%. This suggests that Microfinance is not only positive for recipients but also a safe investment for donators, who are likely to regain their money. It is considered by most NGOs and poverty-fighting organisations that it is a critical tool in fighting poverty. In terms of the individual, it reduces poverty by facilitating asset building, increasing incomes and reducing vulnerability to economic stress, which in turns improves quality of life. Yet it also has a larger effect in building up the industry of an LEDC; through MFIs industry can be broadened and use of technology increased. However, according to the International Finance Corporation, Microfinance still reaches less than 20% of its potential market. Still nearly three billion people in LEDCs have little or no access to formal financial services. Microfinance is common practice in Uganda, Indonesia, Serbia, Honduras and India, but the WTO seeks to expand this and find ways of making it a more universal form of aid. Microfinance is often credited with having a large impact on the empowerment of women in LEDCs. It has offered a different from of education for women, thus giving them greater opportunities. It has also provided a certain amount of access to the financial sector, from which women are often ostracised in LEDCs. Microfinance is not without criticism though. Without proper regulation, two forms of Microfinance have developed: the one designed to serve the poor and another, backed by program managers and investors, who see it as an easy money making opportunity. The later group are no better than loan sharks and reverse the positive effects of the former. For example, the Microfinance program in Mexico, Compartamos, was launched in 2007; however it had an interest rate of 90%, thus producing a return on equity of more than 40%, nearly three time what a commercial Mexican bank would make. The Grameen Bank is seen as the model for a global microcredit movement and the WTO must find ways of ensuring this model is promulgated across the world instead. Similarly many economists have actually challenged the efficacy of Microfinance. David Roodman from the Centre for Global Development said The best estimate of the average impact of microcredit on the poverty of clients is zero ; this is backed with data too. The main charge against Microfinance is that it seems most poverty stricken people cannot raise the funds to pay back the interest on their 3

4 debt, and therefore end up taking another loan to pay for the previous loan. They end up layered in debt and worse than they were before. There have been a number of repayment crises in countries using Microfinance, including India. Is there a way this can be tackled or resolved? Major Countries and Organizations Involved: International Monetary Fund (IMF) - an international organisation of 189 member countries that works to ensure the stability of the international monetary and financial system WTO - World Trade Organisation is an advocate of microfinance Grameen Bank - started by Muhammad Yumus in Bangladesh in 1976, this organisation won the Nobel Peace Prize in 2006 for it efforts in developing microfinance. It also promotes the 16 Decisions which are 16 stipulations that the poor should use to improve their lives SKS Microfinance - One of the biggest microfinance operations in the world, started in 1998 and based in India. The World Bank - an international organisation dedicated to providing financing, advice and research to developing countries, in order to aid their economic advancement. Actively partakes in Microfinance schemes. International Finance Corporation - a subsect of the World Bank, directly involved in supplying Microfinance PARMEC - Programme d'appui à la Réglementation des Mutuelles d'épargne et de Crédit (Programme of Support for the regulation of mutual saving and credit) CGAP - a global partnership involving more than 30 leading organisations, seeking to advance financial inclusion Microfinance Information Exchange (MIX) - a non-profit organization that provides market data and intelligence on the financial service providers catering to low-income populations around the world. 4

5 Timeline of Events: Date: 1983 Event: Formalisation of the Grameen Bank Date: 1989 Event: Exportation of the Grameen Bank Date: 1993 Event: First PARMEC law for West Africa Co-operatives Date: 1995 Event: Creation of CGAP (Consultative Group to Assist the Poor) Date: 1997 Event: First Microcredit Summit Date: 2002 Event: Creation of the Microfinance Information Exchange (MIX) Date: 2005 Event: Creation of the Social Performance Task Force Date: 2005 Event: International Year of Microfinance Date: 2006 Event: Yumus wins the Nobel Peace Prize Date: Repayment crises in Morocco, Nicaragua, Pakistan, Bosnia Date: 2009 Event: Launch of the Smart Campaign for Client Protection Date: 2010 Event: Microfinance crisis in India Date: 2011 Event: Principles for Investors in Inclusive Finance (PIIF) Date: 2012 Event: Universal Standards for Social Performance Date: 2013 Event: First Smart Campaign certifications (Bosnia and India) Relevant UN Treaties and Events: Entry into force date: 07/05/2008 5

6 Title of treaty: Programme Loan Agreement (Programme for Increasing Sustainable Microfinance) between the Islamic Republic of Pakistan and the International Fund for Agricultural Development. Entry into force date: 19/09/2009 Title of treaty: Arrangement between the Government of the Federal Republic of Germany and the Government of the Republic of Sierra Leone amending article 1(1)c of the Agreement of 18 May 2006 concerning financial cooperation regarding the project "Establishment of a New Microfinance Institution. Entry into force date: 23/03/2010 Title of treaty: Letter of Amendment to the Programme Grant Agreement (Rural Microfinance and Livestock Support Programme) between the Islamic Republic of Afghanistan and the International Fund for Agricultural Development. Entry into force date: 18/08/2010 Title of treaty: Guarantee Agreement (Scaling Up Sustainable and Responsible Microfinance Project) between India and the International Bank for Reconstruction and Development. Possible Solutions: Education is one of the solutions to help with people understanding how to manage the loan better and will show how to create a way to generate income, whether that s helping a new business or investing it. It s a way to help people pay the loan back and also to secure a better future without wasting the money and then being unable to pay back the loan and going back into debt. Also, there could be some new resolutions made to limit the interest rates placed on these loans to stop people entering high levels of debt again and being counterintuitive with the money. Bibliography: Microfinance explained: Possible issues with Microfinance: Grameen Bank website: 6

7 SKS Microfinance website: The World Bank Website: IFC website: Information on the World Bank and IFC: Information on the Poverty Trap: Women and Microfinance: t/wcms_ pdf CGAP Website: Indian microfinance in 2016 (a timeline of events): Microfinance article: 7