A Different Kind of Subprime: Risk Management in Microcredit Lenders and their Implications on Debtors

Abstract

Microfinance is a movement which aims to promote financial inclusion and empower individuals through small loans (as well as other services) to finance business ventures in the developing world and beyond. Microfinance aims to meet the financial needs of individuals who are left out of the scope of more mainstream financial services, while avoiding the perceived shortfalls of traditional aid such as dependence. Along with the expansion of microfinancial institutions (MFIs) since the turn of the century and the proliferation of the internet, diligent and prudent management of these institutions has never been of greater importance. Though there is a lot of research on entrepreneurship, business, finance, andmanagement concerning more mainstream practices, it is clear that microfinance is at a frontier of modern commerce. Risk is basic to all business (as well as life in general) and in order for the microfinance movement to maintain its growth, it must be self-sustaining while maintaining its ability to assist meaningful development. This presentation will compare the risk management practices standard to MFIs now, as well as look at how risk is fundamentally different to small entrepreneurship in developing regions in comparison to developed economies. In doing so, it should shed light on the financing needs and realities of target individuals and see how MFIs in the status quo are able to meet them. From this we should seewhere the shortfalls currently lie and where things may be improved.