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Microlending as a form of foreign aid first became popular [#permalink]
23 Feb 2013, 09:50
Microlending as a form of foreign aid first became popular in the 1970s as a way to bypass bureaucracy and administration costs that frequently, though unintentionally, prevented money from reaching individuals and families in struggling countries. In contrast to traditional lending, which tenders large sums to lendees who have strong credit histories and steady employment, microloans are generally made for less than $1,000 and are available without collateral to individuals with questionable credit histories who may or may not be employed. The central qualification for approving a microloan recipient is that the individual have a clearly defined plan for a small business, whether that be a bakery, dairy, tailor shop, or retail store. Recipients are bound to use profits from their business to repay the loan, and lenders since the inception of microloan programs have reported surprisingly high returns on their investment: up to 96% of microloans are repaid on time.
Though there are several administrative options for microloan programs, one of the earliest has remained the most common. According to this approach, a branch of an established bank or a bank specially formed to issue microloans will locate in an area of need and begin issuing loans to local entrepreneurs. In the early years of microloan programs, banks frequently set up village committees, composed of financial advisors and bank staff, to host weekly progress meetings. This proved a difficult administrative strategy to maintain, however, when villagers began to default on their loans just to avoid the meetings and what they often perceived as interference in their businesses. Though most banks quickly revised this approach when they realized its negative potential, the trust vacuum created when they could not offer a return to investors led many banks to seek other forms of administration.
It can be inferred from the passage that the author makes which of the following assumptions about traditional lending in the form of foreign aid? A)Traditional lenders are more interested in earning profit than in giving assistance. B)Leaders of struggling countries are dissatisfied with the approach of traditional lending. C)Traditional lending is not flexible enough to loan amounts less than $1,000. D)A complicated administration process often limited the money available to individuals and families. E)Traditional lending is outdated and will eventually be replaced by microloan programs.
Re: Microlending as a form of foreign aid first became popular [#permalink]
01 Mar 2013, 19:55
D is the correct answer.
The paragraph does not explicitly say that traditional lending was inefficient. It says that microlending first came to the fore to bypass bureaucracy and administration costs that prevented the funds from reaching their intended audience. Therefore the assumption is that traditional systems were not able to bypass these costs and therefore limited the money made available to individuals and families in struggling countries.