The Micro Finance Institution

Lending institution

Cannot afford a huge number of small loan procedures if the administrative cost of each procedure is high: it has to be be much smaller than in a bank, shifting the burden of proof from the operation to the personality of the client. A deep understanding of her/his history, way of thinking, motivation, trustworthiness, bonds to the family and the neighbourhood, reasons for being poor allows a successful long-term relationship made up of recurrent loans each fostering an advancement in her/his life.

Theory of games

has widely shown that repetitive "games" (loans) generate a setting where it is better for the borrower to pay back (so to have the perspective of obtaining trust again) than to cheat. Successful as they are, "tit-for-tat" strategies rely on the first positive move of the lender, who trust first, engendering an economic effect reinforcing the psychological effect of "demonstrating that trust was deserved".

High repayment ratio

With 98% up to 100% loans paid back on time due, is the single strongest reason exhibited by most microfinance institution to the skeptical financial and political community. Yes, the neglected poor, illiterate and lacking formal training, living in doubtful hygienic conditions, after a life of oppression and emargination can be good and remunerative client of financial products, keeping their promises and activating all their entrepreneurial and personal energies.

Monitoring costs

Conversely, to keep the monitoring costs low, many microfinance institutions (MFIs) require the borrower to set up a group of peers involved in a cycle of conditional loans. For one member to obtain the loan, the previous receiver has to pay regularly back. The group exerts surveillance on each member, helps in coping with difficulties and reduces to zero the "idle" time, when the money paid back remains in the institution before being given to a new borrower.

To compete with them, other institutions are offering individual loans, but they should have mechanism to cope with the higher monitoring costs and the (potentially) worse portfolio at risk.

key success factor

Is the recruitment policy of the micro finance institution, which should select people caring about the broader goal of the organization, willing to constantly upgrade their technical and relational competences, and honest. A special monitoring system should indeed be in place to check for dishonest appropriation, which is relatively easy in the business. Technology should be applied to record transactions, but crucial is the organizational double check of clients and employees.

Microcredit

The core product of microfinance is microcredit

An extremely small loan to purchase productive assets boosting the poor's revenue allowing repayment over a short period of time in small instalments without the guarantee of collateral. The size of the loan is small in three dimensions

1. in absolute monetary values, as compared to typical business loan, so as to operate in a segment where there is no banking competition;

2. in relation to the borrower's income, so that payback is easier;

3. in respect to the lender's portfolio, so that the default of any single borrower has no impact on its financial soundness.

Microfinance

A platform to deliver financial products and complementary services reaching the poor in order to get them out of poverty. By providing capital, trust, social esteem, information, knowledge, competences, empowerment, networking, social capital, technology and market access, microfinance institutions and other sources of microfinance become active subject in the fight against poverty in all its dimensions and levels.

The integral development of the human potential of the client and of her/his family, neighbourhood, and social networks is fostered by both well-established and innovative financial products, whose high repayment ratio, remunerative interest rate (or price) and low administrative cost guarantee the economic sustainability of a well-managed institution.

Economic Cycle

The predictable long-term pattern changes in national income. Traditional business cycles undergo four stages: expansion, prosperity, contraction, and recession. After a recessionary phase, the expansionary phase can start again. The phases of the business cycle are characterized by changing employment, industrial productivity, and interest rates.

Fundamental Analysis

For a currency trader, fundamental analysis focuses on key underlying economic and political factors to determine the direction of a currency's value. There are a number of fundamental indicators traders may follow that reflect how an economy is changing and gleam insight into Forex market prices to come.

What Fundamentals Are Worthwhile?

You should look at the most important fundamental variables and compare them to determine the true health of the economy. The most important variables will change year to year as international trade dynamics evolve and central bankers & investors redirect their fixations.

Most investors look at three key variables: monetary indicators, economic indicators, and sentiment. Let's take a look into these variables by evaluating the US economy. Here is a brief explanation and example of each.

NAFTA

Acronym for North American Free Trade Agreement, which refers to a 1994 agreement reached by the United States, Canada, and Mexico that instituted a schedule for the phasing out of tariffs and eliminated a variety of fees and other hindrances to encourage free trade between the three North American countries.

Narrow Market

A market with a small number of bid and ask offers, and characterized by low liquidity, high spreads, and high volatility. Opposite of liquid market.

Composite Index

Nasdaq Composite Index

A market-value weighted index of all common stocks listed on Nasdaq, created in 1971, and used mainly to track technology stocks.