Question

8. (5) How does microfinance work? Why are women often the beneficiaries of microfinance?

9. (6) Why is economic aid usually not correlated with economic growth?

Answer 1

8. How does microfinance work?

Microfinance, pioneered by the Nobel-Prize winner Muhammad Yunus, helps the financially marginalized by providing them with the necessary capital to start a business and work toward financial independence. These loans are significant because they are given even though the borrower has no collateral. However, the interest rates for these microloans are often very high due to the risk of default.

The term microfinance encompasses microloans, micro-savings, and microinsurance. Microfinance institutions provide small loans and other resources to business owners and entrepreneurs to help them get their businesses off the ground. Many of the recipients are in developing countries, and could otherwise not obtain a traditional loan.

Micro-savings accounts are also under the microfinance umbrella. They allow entrepreneurs to have a savings account with no minimum balance. And microinsurance provides these borrowers with insurance, at a lower rate, and with lesser premiums.

Women in microfinance

Seventy percent of the world’s poor are women. Yet traditionally women have been disadvantaged in
access to credit and other financial services. Commercial banks often focus on men and formal businesses,
neglecting the women who make up a large and growing segment of the informal economy.
Microfinance on the other hand often targets women, in some cases exclusively. Female clients represent
eighty-five percent of the poorest microfinance clients reached . Therefore, targeting women borrowers
makes sense from a public policy standpoint. The business case for focusing on female clients is substantial, as women clients register higher repayment rates. They also contribute larger portions of their income to household consumption than their male counterparts. There is thus a strong business and public policy
case for targeting female borrowers.

Children of women microfinance borrowers also reap the benefits, as there is an increased likelihood of
full-time school enrolment and lower drop-out rates. Studies show that new incomes generated from
microenterprises are often first invested in children’s education, particularly benefiting girls. Households
of microfinance clients appear to have better health practices and nutrition than other households .
Positive environmental impact is also achievable as microfinance programmes may support green jobs
and renewable energy systems . Microfinance therefore makes a strong contribution to the realisation of
the Millennium Development Goals.

9. This is a case through which we can explain this question. We find that developmental aid has a strong, robustly significant and positive eff lect on growth. The
coefficient estimates show a sizable marginal impact of developmental aid on growth: in cross-country regres-
sions, an increase in average bilateral aid from Nordic countries by 1 per cent of GDP during 1960-1985 is
associated with average growth rates in the 1990s that are higher by an (enormous) 1.5 percentage points.
The effect is slightly smaller, yet equally remarkable, when bilateral aid from a larger number of donor coun-
tries is used as a proxy for developmental aid. In addition, multilateral aid has a strong, positive impact on
growth. We also find that contemporaneous geopolitical aid is negatively correlated with growth. Countries
which received 1 additional percentage of GDP in geopolitical aid have experienced average growth rates in
the 1990s that are lower by between 0.06 and 0.09 percentage points. Panel regressions confi rm the cross-
sectional results: an increase in average bilateral aid from countries ranking highest according to the Com-
mitment to Development Index by 1 per cent of GDP is associated with average growth rates 25 years later
that are higher by 1.75 percentage points. A similar increase in bilateral aid from Nordic countries is associ-
ated with growth rates that are higher by 0.5 percentage points ten years later.