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Eae 302 Question Paper
Eae 302
Course:Bachelor Of Economics And Finance
Institution: Kenyatta University question papers
Exam Year:2015
KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2015/2016
FIRST SEMISTER EXAMINATIONS FOR THE DEGREE OF BACHELOR OF ECONOMICS
EAE302: ECONOMICS OF MICROFINANCE
DATE: MONDAY 30TH NOVEMBER 2015 TIME: 11.OO A.M-1.00 P.M
INSTRUCTIONS:
1. Answer question ONE and any other TWO questions
2. Question ONE is COMPULSORY and carries 30 marks
3. ALL other questions carry20 marks
Question one
a.Define or explain the following terms used in microfinance:
I. Declining method of calculating interest rate.
II. Moral hazard
III. Adverse selection problem.
IV. Ex ante afficiency.
V. Effective interest rate.
b. Name and explain five risk factors a regulator of microfinance institutions looks out for to keep the microfinance institutions afloat. 10 marks.
c.list five main components of the cost structure used by microfinance institutions to determine marginal costs and the interest rate on loans. 5 marks
d. Give five reasons why the principle of marginal returns to capital is not applicable to Kenya and other developing countries. 5 marks
QUESTION TWO
a) If you have teo money lenders, one based in Kilometer one market adjacent to Kenyatta University and another in Sori Market in Homa Bay county. The Kilometer one money lender knows that all his clients are default free and charges 30% interest rate to cover costs plus a reasonable profit. Suppose the Sori market money lender knows that 50% of his clients are defaulters. At what interest rate will the Sori market moneylender charge his clients in order to cover his losses due to defaulters and make a rate of return equivalent to that of the Kilometre one moneylender?(use calculations to arrive at your answer) 10 marks
b) What are the two complementary reasons, which account for the different interest rates charged by the Kilometre one and Sori moneylenders? 4 marks
c) From your study of microfinance, give three policy recommendations you would give to the governor of Homa Bay county, which if implemented would come to the rescue of honest and hardworking borrowers with no record of default so that the interest rate in Sori could come down toward the Kilometer one interest rate. 6 marks
QUESTION THREE
a) Draw a sketch graph and explain how profit maximization under monopolistic competition of a shylock in the money market works. 6 marks.
b) If being a moneylender is a profitable as many people think, why don’t shylocks face greater competition as suggested by economic theory? 7 marks.
c) Free entry into a maket by business is often taken to imply that there is a perfect competitive market. Why mighty seeing free entry into local credit markets in the informal sector not be suffiecient to determine that the markets are competitive?
7 marks
QUESTION FOUR
a.Suppose when you graduate you decide to take advantage of the governments Youth Enterprise Development fund to become self employed. The YEDF offers you a chance to borrow ksh.200000 at a subsidized rate of 6% per annum. State which of the following strategies you would choose and why?
I. Invest 200000 in your family business and obtain a net return of 15% per annum, but incur an effort cost equivalent to ksh 26670 per annum.
II. Deposit the money in a nearby microfinance institution that will pay you an interest rate on deposit of 2.5% per annum.
Use calculations to arrive at your answer. 10 marks
b. a foreign direct investor (FDI) has US$ 2 million to invest in either Kenya, USA or Japan. Why might investment in Kenya in August 2016, where the expected rate of return is projected to be 23% in nominal terms, seen more risky than in USA or Japan, where the projected rate of return is 6% and 5% in real terms respectively? 10 marks
QUESTION 5
a. What are the main differences between a ROSCA and a Credit co-operative? 4 marks
b. If you compare the main disadvantage of ROSCAs and credit co-operative, why are the ROSCAs more common than credit co-operatives 10 marks
c. Why has there been a need for the emergence of microfinance when credit cooperatives, which have been in the existence for over a century, could perfotm the same functions? 6marks
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