Micro Finance Mock Test

Group methodologies in the MFI sector help in creating social collateral (peer pressure) that can effectively substitute physical collateral. This means that when borrowers are part of a group, they have a collective responsibility to repay their loans. If one member of the group defaults, it puts pressure on the others to make sure they repay their loans on time. This peer pressure acts as a form of collateral, reducing the need for physical collateral such as property or assets. By relying on social collateral, MFIs can extend loans to individuals who may not have traditional forms of collateral, increasing access to credit for those in need.

Accumulating Savings and Credit Associations are formed when a pre-determined amount of money is brought to weekly meetings and collected. This money is then passed to a different member each week on a rotating basis. This process allows members to accumulate savings over time and also provides them with the opportunity to borrow from an accumulated fund outside of their own contributions. Additionally, the other options mentioned in the question, such as saving money in a secure manner and the ability to start a new round or disband at the end of the cycle, may also be features of Accumulating Savings and Credit Associations, but they are not the defining characteristic.

The given answer is "Adverse selection". Adverse selection refers to the problem of asymmetric information in which one party has more information than the other, leading to a mismatch in the selection of borrowers. However, employment creation, empowerment of disadvantaged groups, and poverty reduction are all common development objectives of Microfinance Institutions (MFIs). These objectives aim to promote economic growth, social inclusion, and poverty alleviation in underserved communities.

Regulating microfinance in a country provides various benefits such as ensuring financial soundness, protecting the client's interest, and reinforcing public trust. However, revising the cost of capital upwards is not a benefit of regulation. This would increase the cost of borrowing for microfinance institutions, potentially making it more difficult for them to provide affordable loans to their clients, especially those who are financially vulnerable.

According to the Stakeholder concept, a microfinance employee would be considered a primary stakeholder in a typical microfinance sector. This means that the employee has a direct and significant interest in the success and outcomes of the microfinance sector. They are closely involved in the operations and decision-making processes of the sector and their actions and contributions have a significant impact on its overall performance.

A rotating savings and unions credit association can be categorized as an informal microfinance institution because it operates on a rotating basis, where members take turns receiving loans from the pooled savings of the group. This type of institution is typically community-based and provides financial services to individuals who may not have access to formal banking services. Unlike formal institutions like building societies, rural banks, or village banks, rotating savings and unions credit associations are less regulated and often rely on trust and social relationships among members.

The government is considered an external stakeholder because it is not directly involved in the day-to-day operations of the organization. It has an interest in the organization's activities and outcomes but does not have a direct role in decision-making or management. Additionally, the government is considered a secondary stakeholder because its interests may be affected by the organization's actions, but it does not have a direct financial or contractual relationship with the organization.

In the microfinance industry, the minimum capital requirement is a significant constraint for both new entrants and existing institutions. It establishes the amount of capital a microfinance institution must maintain to operate legally. This requirement ensures financial stability and protects clients, but it can be a barrier for new institutions that might struggle to raise enough capital. It can also limit existing institutions' growth or expansion if they need to maintain or increase their capital levels to meet regulatory standards. This constraint affects the industry by influencing who can enter the market and how established institutions can scale their operations.

A client would be classified as an external, primary stakeholder because they are not part of the organization but have a direct and significant interest in its activities. Clients are the main recipients of the organization's products or services and their satisfaction is crucial for the success of the organization. As primary stakeholders, clients have a high level of influence and their needs and expectations are prioritized in the decision-making process.

Strategic decision making based on stakeholder theory involves considering the interests and needs of various stakeholders. Rationality refers to making decisions based on logical reasoning and analysis. Intuition involves relying on gut feelings and instincts in decision making. Political behavior refers to the influence and power dynamics among stakeholders in decision making. However, information is not a feature of the process as it is a necessary component for making informed decisions.

A village bank will be categorized as a semi-formal microfinance institution. Village banks are community-based organizations that provide financial services to individuals and small businesses in rural areas. They typically offer small loans, savings accounts, and other financial products to help promote economic development in the local community. While they may not have the same level of formality as traditional banks, village banks play a crucial role in providing access to financial services in underserved areas.