Question

After defining microfinance, explain its mechanism of group lending and dynamic incentive. What are the main challenges faced by microfinance?

Answer 1

Group lending is helpful in providing money to the member/s of a group with the condition being all the members of the group would be liable for the loan and will be repaying it with interest. This has helped extensively in the rural areas and has built capacity in many areas.

Dynamic incentives work good in the group lending as the volume of trust by the microfinance agencies over the group increases as the people are more. The incentive is provided by delaying the repayment process of the money lendes giving extra time to the borrower for repaying the amount

The problems that microfinance Bank faces after this is ove rindebtness, although the bank has the surity that the borrowers will pay the amount but still their indebtedness increases with less repayment. Also, the interest rates that are charged by microfinance Banks are higher than the commercial banks because their is higher rish of repayment as compared to the commercial ones.