Micro-Finance Frauds Essay : Important For Nabard Phase 2 Descriptive Exam 2015

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Micro-Finance Frauds Essay Nabard
Corruption may also be related to MFIs indirectly, i.e. MFIs may offer credits or accept deposits from clients that pursue corrupt businesses and money laundering activities. There are,however, good reasons to assume that this is not a major problem. On the one hand, many MFIs, above all MFIs linked with international donors and NGOs, explicitly apply exclu sion criteria on the type of business activities they support and they know the identity of their customers very well.

On the other hand, even though money launders may operate through fictive companies, casinos, jewellery stores or import exportactivities, they do not tend to choose MFIs where a deposit of $50000 would immediately draw attention to them. They rather prefer larger financial institutions with international rela tions. It is within these institutions that bankers have to watch out for major or unexpected transactions. MFIs, by contrast,typically operate in segments of poor people where the micro entrepreneursł business activity does not provide many options to be corrupt. Corruption, if it occurs, mostly takes the form of petty corruption often driven by some type of extortion, i.e. micro entrepreneurs bribing civil servants for due (and legitimate) services

There are different levels where corruption may affect MFIsdirectly and indirectlyThe most probable type of corruption and financial crime thatmight occur at MFIs is fraud. Although fraud occurs in all business sectors, institutions dealing with finance are specifically exposed to it. Loan officers and managers may make fictitious loans, transfer funds into their personal accounts, re ceive bribes or simply steal cash

Major Areas for Microfinance fraud, money laundering and financial crime 
■ Grant fictitious loans or grant loans to ghost borrowers (transfer ring funds into personal accounts) or non existing clients
■ Loan Officer collects payment receipts , issues receipt but doesnot deposit .This could happen with client prepayments or regular payments also.
■ Make loans to family, friends and close associates (loans not being repaid thereafter)
■ Receive kick backs from clients (clients paying bribes to get a loan, collusion with client to approve bogus loans and subsequentsharing of loan proceeds)
■ Manipulate financial data: misstating, misrepresenting (not recording incoming payments or recording non existing payments of interest and principal of ghost loans)
■ Steal cash
■ Provide micro credit to finance illegal activities
■ Loan Officer charges cliemts an unofficial fees(Bakshish) to apply for loan

Corruption and money laundering Definitions

Corruption is commonly defined as the abuse of official powerfor private gain or, more generally, the misuse of a position of trust (within administration, private and public companies or politics) for a dishonest personal benefit. The main forms of corruption involve bribery, embezzlement, fraud and extor tion. Depending on the focus, corruption may also take very subtle forms, such as attending unnecessary seminars orconferences implying higher inefficiency within the company or institution. Sometimes corruption is even understood in a very broad context as something against lawń.Money laundering refers to the act of concealing the origin(source and identity) of funds, either because funds have beengenerated by illegal means or because they are subject to reporting requirements that involve paying taxes and other du ties. Money launderers may operate through financial systems


There is no corruption free world. Corruption may occur in an MFI as it does in any other type of company, organisation or government institution. Empirical experience, together withthe theoretical line of reasoning, however, provide good reasons to assume that corruption in MFIs is not a big issue.Beside the fact that most MFIs have high quality lending portfolios, relatively few cases of corruption have been report ed. A lot of this finding has to do with the type of activitiesMFIs are doing, i.e. taking deposits and providing small loansfor poor people. In this business model there is not much room for corrupt activities. Even the high borrowing rates arenot suitable to attract corruption, as they reflect high costs of handling micro loans. There is simply no fast money to beearned in microfinance.

Sources :
www.cgap.org/docs/Guideline_RegSup.pdf | http://www.microlinks.org
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