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Final Project

Credit Opportunities in Nicaragua

Henry Wilson and I researched whether or not credit opportunities have the potential to accelerate economic growth in Nicaragua. We examined the economic background of Nicaragua, the growth of the financial system, sources of credit, and possible credit solutions for the future. The most interesting part of the research related to microfinance institutions (MFIs) that provide small loans to individuals to invest in capital and enterprise.

Access to Credit

Only 30% of the Nicaraguan population has access to credit while only 4% of rural families have access. Moreover, only 10% of business enterprises are funded by loans. The fact that most of the credit sources are located in the urban city centers away from rural populations only exacerbates this problem. Consequently, most individuals have to fund business opportunities with their own money. As a result, people without credit cannot act on their business ideas and take advantage of profitable opportunities. To alleviate this issue, MFIs have come in and become a vital source of financing for many rural business projects.

Microfinance

Microfinance companies providing 10% of total credit and giving credit to almost a quarter of borrowers. Unlike the major banks that only cater to urban clients, MFIs covers all of the regions in Nicaragua equally and does not have a geographic preference. This encourages efficiency in lending as it promotes competitive pricing, minimized transaction costs, and integration of financial intermediaries. Another major difference between microfinance organizations and banks is the type of loan that each institution makes. The commercial banks in Nicaragua write many personal loans to individuals where as MFIs mainly focus on loans for commerce.

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Complications with Microfinance

Microcredit is not without its flaws though. Many people argue that some institutions have not monitored the type of loans that they are making closely enough and have instead been focused on profits. Thus, some people that are not creditworthy are receiving loans anyway and consequently defaulting on them. The effects on the economy due to microfinance are also difficult to measure. Due to the relatively recent development of these institutions as major sources of credit for some groups of people, the economic research on the topic is unclear. Some propose that the demand for microloans and the pool of creditworthy borrowers are actually much smaller than reported. Additionally, some believe that resources should be allocated to directly contributing to the factors of real economic growth (healthcare, education, birth rates) rather than simply providing more financing options.

Concluding Thoughts

The arguments against microfinance institutions do not hold much weight because when the borrowers default, they lose out on the remaining principal of the loan. MFIs have been criticized for charging exorbitant interest rates, but the cost of making these loans must be taken into consideration. These borrowers are high risk and the rate the institutions charge must reflect that. Of course, they should better monitor the types of loans they make to avoid the strife that comes with many disgruntled borrowers defaulting on their loans. Overall, Henry and I believe the MFIs are a net benefit to rural communities, especially in Nicaragua. Even though they might charge high rates and the economic impact may be difficult to measure, these microloans give individuals the chance to empower themselves. Although some may abuse the system, MFIs should be allowed to continue to operate to give the people who do wish to change their lives the opportunity to do so.

You can access the full presentation here.