Title: Microfinance Beyond Group Lending
1Microfinance 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
21) 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
3At the end of the first period R dy (1- v)
which is maximized when bank sets v 0 ? R
dy
4Now 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
5Frequent 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
82) 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