“The credit activities of the informal sector should be discouraged.” Support the statement with arguments.
The credit activities of the informal sector should be discouraged because:
- 85% of loans taken by the poor households in the urban areas are from informal sources.
- Informal lenders charge very high interest on their loans.
- They try to charge more and more interest on their loans.
- There are no boundaries and restrictions.
- Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
- In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower.
- This could lead to increasing debt and debt trap, therefore the credit activities of the informal sector should be discouraged.