PT159 S2 P2 Q13 ExplanationMicroloans

The following two passages were adapted from articles published in 2005 respectively.

Passage A There have been two notable efforts to supply credit to self-employed poor people in developing countries. One has been the creation by developing country governments of state banks, particularly to provide financing to the rural poor. These have mostly been a disaster. The other, much more successful effort involved a started in 1976 and soon became famous for its “microcredit” business model.

To qualify, Grameen’s customers had to be extremely poor, typically earning less than a dollar a day. To overcome the lack of collateral or data about creditworthiness, customers were required to join small groups whose members monitor each other at weekly meetings, applying varying degrees of pressure to ensure repayment. As loans but it does have real virtues and has since spread around the world.

Why did microfinance organizations like Grameen originally limit themselves to providing credit? They assumed that poor people were unable to save and that their sole need was for capital. This assumption, however, was probably faulty at the outset. When BRI, a failing state-controlled rural lender in Indonesia, was transformed into a bank deposit. This has been an extraordinary success: BRI now has 30 million savings accounts.

Passage B SafeSave is a financial services provider operating in the slums of Dhaka, Bangladesh. With fewer than 5,500 clients, SafeSave is still a small organization, but it is attracting attention because of its unique products. These products are designed to enable very poor urban residents to turn sums as conveniently and in as many ways as possible.

In essence, SafeSave offers its clients a full banking service on their doorstep, without asking them to form groups. Bank workers, called collectors, visit each client every day, six days a week. On each visit clients may save, or withdraw, or repay loans in any amount they choose. They may also take why SafeSave’s clients tend to pay back loans more quickly than do those of Grameen Bank.

The low interest rate it charges for loans is enough to cover SafeSave’s operational costs, in part because of cost-cutting devices such as recruiting collectors from among the urban poor themselves, promises to become fully economically sustainable.