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Microfinance Beyond Group Lending

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under the threat of not being refinanced by the MFI, and ... methodology only possible in densely populated areas and close knit societies? ... – PowerPoint PPT presentation

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Title: Microfinance Beyond Group Lending


1
Microfinance Beyond Group Lending
  • In the last class we argued that
  • under the threat of not being refinanced by the
    MFI, and
  • under the threat of social sanctions,
    grouplending can potentially circumvent credit
    market imperfections
  • Is successful implementation of the group-lending
    methodology only possible in densely populated
    areas and close knit societies?
  • No. In particular, in todays class we will
    argue that there are other innovations
  • 1) Some peculiar to group lending à la
    Grameen, but that do not hinge on group lending
    per se
  • 2) Some that do not involve groups at all

2
1) Innovations that already exists in group -
lending
  • Progressive lending
  • Assume two periods of production
  • An investment requires 1
  • And at the end of each period the borrower
    generates y gt 1
  • If the borrower defaults strategically, she will
    not be able to invest in the second period
  • As before, we use the same methodology to
    determine R
  • y vdy y - R dy

3
At the end of the first period R dy (1- v)
which is maximized when bank sets v 0 ? R
dy
4
Now suppose progressive lending like group
lending à la Grameen Is good for incentives as
it increases the opportunity cost of
non-repayment ? dy gt dy And R ? dy gt R
dy Remark 1 In a multi-period model borrowers
can wait to strategically default until loan
sizes have grown substantially unless there are
reputation considerations (absent from this
simple model) Remark 2 Competition
undermines a progressive lending device
5
Frequent Repayment Installments
6
  • Explanations
  • Early warning system
  • Saving constraints
  • Capture household flows earlier
  • Remark 1 Transactions costs need to be
    relatively low
  • Remark 2 Seasonality in agricultural areas is
    a problem
  • And, in general, covariant risk in agriculture is
    a major problem

7
  • Targeting women
  • More reliable than men
  • More cautious
  • More sensitive to verbal hostility
  • Have fewer alternative sources of credit

8
2) Innovations not seen in group
lendingCollateral
9
  • Public Repayments
  • Some advantages from the lenders standpoint
  • Threat of stigma
  • Transaction costs are reduced
  • Eliciting information about errant borrowers
  • Facilitates education and training
  • Encourages inexperienced borrowers to approach
    the bank
  • Enhancement of internal control and lower
    incidence of fraud

10
  • Information gathering by bank staff
  • And
  • Cross Reporting

11
  • Now, when comparing group lending contracts
    with bilateral contracts we find the following

? Next class A-M Chapter 8
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