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

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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
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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

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

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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

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• Information gathering by bank staff
• And
• Cross Reporting

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

? Next class A-M Chapter 8