Microcredit Under the Microscope Flashcards
Author of the paper?
Banjeree (2013).
Countries where microcredit has had the greatest success?
BANGLADESH, BOLIVIA, INDIA, INDONESIA. Interest rates significantly lower than 30% p.a.
Why do group liability contracts discourage risk taking?
Social sanctions.
Group members have no stake in the upside from any risk taken by their fellow group members.
Why might loan type and rate of default be correlated?
A risk-taking, dynamic individual may prefer not to get involved with a group, thus generating a correlation between group liability and repayment rates.
MONGOLIA
No difference in default rates between group and individual loans.
BUT… more business creation and higher food consumption in group liability locations.
THAILAND
Groups with greater number of family members have higher default rates.
PERU
Groups with more people living in the same neighbourhood and are ethically similar have higher repayment rates, and higher than required levels of savings.
Higher savings indicate greater faith that others will repay.
Why would frequent small repayments lessen the chance of default?
Splitting the one final repayment into multiple repayments throughout the life of the loan makes that final payment less onerous.
Why would frequent small repayments increase the chance of default?
The first loan payment is now further away from the reward of repayment (a new loan), so default is more tempting.
How can microcredit solve a self-control problem?
The structure of microcredit is helps to reduce the problem of temptation goods because borrowers must always have enough cash to repay the next instalment.
Low interest micro lenders:
THAILAND, PAKISTAN, INDIA, MOROCCO, MONGOLIA.
Evidence from the low interest micro lenders:
Credit leads to business creation and an increase in ownership of consumer durables and business assets, but lack strong evidence linking business creation to increased consumption.
High interest micro lenders:
PHILLIPINES, SOUTH AFRICA.
Evidence from the high interest micro lenders:
Borrowers take loans to deal with some urgent need - this kind of credit allows people to deal with emergencies.
Why is the impact of microcredit so limited/
Borrowers may not need microcredit.
People borrow to consume, not to invest.
S-shaped production function.
Terms of the loans (requirement to start paying right away discourages any kind of risk taking).
Borrowers are not particularly good at growing businesses.
Borrowers have poor financial judgement.
