Microcredit - A Way to Overcome Problems of Financial Markets in Developing Countries?

University essay from Lunds universitet/Nationalekonomiska institutionen

Abstract: Fighting poverty is the overall goal of the Millennium Development Goals (MDG). Africa has highest percent of poor people in the world and in order to achieve the MDGs poverty and development trends must take a new turn in almost all African countries. The overall objective with this study is to analyse and discuss why financial markets work inefficiently in developing countries and hence fail to reach poor and how provision of microcredits could be a way to overcome these problems. This is done through a case study on the Grameen Bank in Bangladesh and a case study on the microcredit sector in Ghana. Financial markets in developing countries function inefficient mainly due to the high levels of asymmetric information and risk. Financial markets in developing countries are characterised by dual economies, segmented and fragmented markets and a lack of supporting institutions. Asymmetric information gives raise to problems with adverse selection and moral hazard and consequently problems with screening, monitoring and enforcement. Microcredits are believed to be a way to overcome these problems. The overall conclusion of this study is that the provision of microcredits has the potential to be a means to solve problems of financial markets in developing countries. However, there might be better ways to adopt microcredits to the African context. Therefore there needs to be more focus and research on Africa and the effect provision of microcredits have on poverty alleviation in Africa.

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