Increasing number of credit programs in low-income countries target Micro enterprises. This research focuses on micro credit between the UK based small scale entrepreneur and micro financed based entrepreneur who live in developing countries. According to the principle of diminishing marginal returns to capital enterprises with relatively slight capital should be able to earn higher returns on their investments than enterprises with a great deal of capital. Micro enterprises should thus be able to pay banks higher interest rates than wealthier enterprises.
The small size of the loans and the fact that they are often not backed by collateral, has given rise to experimental lending techniques. One such technique is group lending, also called joint liability lending (pioneered by the Grameen Bank based in Bangladesh). Borrowers are required to form groups, and to bear some liability for the loans of fellow group members. As several economists have shown theoretically, joint liability lending can partially or completely overcome the informational and enforcement limitations that make uncollateralized lending hard – in the context of moral hazard (e.g., Stiglitz, 1990, Banerjee et al., 1994), adverse selection (e.g., Ghatak, 1999, 2000), and strategic default (e.g., Besley and Coate, 1995).
The UK is well endowed with capital and skilled labour (including entrepreneurship) compared with Bangladesh, so can produce goods and services with more efficiency through achieving economies of scale i.e. it has an absolute advantage and trading some of it for the product of the other country. Conversely, countries like Bangladesh have fewer alternative finance options compared to the UK. Micro credit helps developing counties in terms of giving access to finance but high interest rates cause problems. Without micro credit borrower would find life harder but with high interest rates borrower may survive for short term but not for long-term.
This paper will exemplify that debt is not an effective tool for helping most poor people to enhance their economic conditions also state of management of micro finance based enterprises. This paper proposes microfinance insights points to areas where new research is desirable, particularly around possibilities and constraints for serving by the poor and social effects.
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Датум:
16.06.2011.
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669
