Microfinance: where do we stand? Flashcards
Authors of the paper?
Armendariz and Morduch (2005).
Who, where and when did the microfinance initiative start?
Yunus in Bangladesh in 1976 - Grameen Bank.
Repayment rate for Grameen Bank?
98%.
How does Grameen Bank work?
Group loans.
Individuals receive loans but they must form a group of 5 others.
They meet weekly with the loan officer to collect loans and make repayments.
If a borrower defaults, they and everyone else can no longer get any more loans (unless other members bail them out).
Therefore, incentives to not default if they want to continue getting loans.
Interest rates roughly 20%.
How are problems of adverse selection overcome?
Without perfect info, banks must charge high rates to everyone.
Therefore, safe borrowers leave the market - inefficient.
BUT… group lending leads to assortative matching.
Safe borrowers form groups, meaning risky borrowers have to form groups with other risky borrowers.
All groups face interest rate but safe groups have lower effective rates because they pay less often for their defaulting peers.
How are problems of ex ante moral hazard overcome?
Normal banks cannot effectively monitor borrowers. Also no collateral so more incentive to make riskier investments.
BUT… group members have an incentive to monitor each other and can impose social sanctions when risky projects are chosen.
Delegation of monitoring from lender to borrowers involves efficiency gains - interest rates fall.
How are problems of ex post moral hazard overcome?
Normally, individuals have incentives to under-report profits or strategically default.
BUT… group lending with joint responsibility can lower the incidence of strategic default - social sanctions.
Members should therefore declare their true profits.
Why was the group liability requirement relaxed, prompting the formation of Grameen Bank II?
If one borrower cannot repay it puts pressure on the other members to bail them out, but they may not have the resources to bail them out?
Now none of them can get loans, even though they may each be amazeballs clients.
If joint liabilities are relaxed, how are high repayment rates maintained?
Progressive lending.
Flexibility with regard to collateral - ‘notional’ value of assets.
Female customers.
Savings - voluntary and compulsory.
Proportion of clients that are women in the world’s 34 largest micro lenders?
80%.
How many borrowers had NO repayment problems in Bangladesh 1988?
81% of women compared to 74% of men.
How many borrowers missed payments before the final due date in Bangladesh 1995?
1% of women compared to 15% of men.
In reality, the average microlender has had difficulty attaining self-sustainability and low costs…
…so one solution is to target finance to those around the poverty line or just above it. The increasingly competitive microfinance environment makes it difficult for programs committed to serving the very poorest - e.g. BOLIVIA and BANGLADESH.
