- 1. Introduction to MicronanceNovember 2007()
IntroductionNovember 2007 1 / 14
2. The Nature of Micronance Microcredit: collection of banking
practices built around small loans, typically with no collateral
Micronance: also includes eorts to ,! stimulate savings ,! provide
insurance facilities ,! distribute and market clientsoutput
Programs exist worldwide ,! well-established programs in
Bangladesh, Bolivia and Indonesia ,! new programs in Mexico, China
and India ,! villages along the Amazon ,! inner-city Los Angeles,
Toronto and Halifax Over 70 million clients (grown at 40% per year
since 1997) () Introduction November 2007 2 / 14 3. The Grameen
Bank: The Beginnings of Micronance Started by Mohammed Yunus (1976)
with help from Bangladesh Bank Later helped by IFAD, Ford
Foundation and several governments Basic group lending mechanism
(Grameen I): ,! groups of 5 formed voluntarily ,! 2:2:1 staggering
at 4-6 week intervals ,! cycle continues as long as loans are
repaid ,! repayments made weekly in public ,! joint liability ,!
progressive lending Initial analysis attributed success to role of
"joint liability" More recent analysis emphasizes other aspects ,!
dynamic incentives ,! high frequency repayment schedule ,! 95%
female borrowers ,! current movement towards individual lending
(Grameen II) () Introduction November 2007 3 / 14 4. Adverse
Selection and Joint LiabilityCan group lending make it possible to
"implicitly" charge safeborrowers lower interest rates and keep
them in the market?Joint liability ) incentive for "assortative
matching"() IntroductionNovember 2007 4 / 14 5. Example: 2 member
group One-period project requiring $1 investment Bank cost of $1
loan = ks Fraction q of borrowers are "safe": gross return = y The
remaining 1q are "risky": y with prob. p Gross return = 0 with
prob. 1 p Indentical expected return: p y = y Borrowers know each
others types, but lender doesn t Assortative matching ) a fraction
q of groups are (safe, safe) () IntroductionNovember 2007 5 / 14 6.
If both types of borrower are in the market, what is the break-even
repayment, Rb ?,! assume that y is large enough that y > 2Rb
Then the probability of repayment by a risky pair isg = 1 (1 p )2=
2p p 2 > psince default occurs only if both members fail) break
even repayment:kRb = q + (1 q )g This must be less than the minimum
repayment without group lending kRb =q + (1 q )p ()
IntroductionNovember 2007 6 / 14 7. Implications In this case risky
borrowers can repay more often ,! risk is transferred from bank to
risky borrowers ,! allows bank to lower interest rate and still
break-even ,! safe types may be lured back into the market ()
IntroductionNovember 2007 7 / 14 8. Moral Hazard and Peer
MonitoringJoint liability ) incentive for members to impose
sanctions on eachother to induce more eort ) relaxes IC constraint
) more projects will be fundedCan also help to overcome enforcement
problemRelies heavily on use of "social sanctions",! is this
realistic ?,! is this a good thing ?() Introduction November 2007 8
/ 14 9. Problems with Group Lending in PracticeMixed results across
countries reects dierences in trade-o betweenbenets and costsGroups
may be di cult/costly for borrowers to set upAttending group
meetings can be costly in some cases; benecial inothersTransfers
risk from bank to borrowersBeyond a certain lending scale,
individual contracts may be preferredSocial sanctions for default
often seem too harsh and/or not credible,! what if the defaulter
has trouble through no fault of her own?,! punishment imposes a
"deadweight loss"() Introduction November 2007 9 / 14 10. Beyond
Group Lending Emerging view: joint liability is often not the main
key to success Shift toward individual lending for the "not so
poor" Grameen II proposal Emphasis on dynamic incentives to induce
repayment,! e.g. progressive lending,! a key element of Grameen
bank lending () Introduction November 2007 10 / 14 11. Progressive
Lending (two period example)Invest L to get output y = AL > LLet
= discount factorLet v = probability of being renanced despite
defaultgross borrowing rate = RIC constraint for xed LAL RL + AL AL
+ vAL ) lender maximum repayment:s R = A(1v)() Introduction
November 2007 11 / 14 12. Suppose loan grow by a factor > 1
between periodsIC constraintAL RL + ALAL + vAL) maximum repayment
R= A( v) > RIf R < r < R , loans will be made that
previously weren t()IntroductionNovember 2007 12 / 14 13.
ImplicationsProgressive lending can help to relax borrowing
constraintBut, in a multi-period context, borrower may choose to
default onceloan size becomes large enough() Introduction November
2007 13 / 14 14. Privatization of Micronance ?Presented as a
market-based strategy for poverty reduction, butcontinues to be
heavily subsidizedIntended strategy: subsidies initially, then
operate without them oncescale economies and experience drive down
costsNeed to attract savings, issue bonds or obtain commerical
fundsIn July 2002 Financiera Compartamos (ACCION) issued a 100
millionpeso bond,! to get A+ rating from S&P, lending rates
exceed 110%Why worry about high rates if enough borrowers can pay
them?,! complementary inputs,! increasing returns at low levelsTo
serve the poorest, subsidies may be essential() Introduction
November 2007 14 / 14
