Financial

Question 1

Main economic services of financial sector?

Answer 1

Payment services: More efficient

Savings: s

Question 2

Correlation of r and growth?

Answer 2

r>0 leads to 3X faster growth (World Bank)

Question 3

Why do formal institutions fail in rural areas

Answer 3

Banks require ‘acceptable’, formal capital which poor don’t have.
Compared to labour for informal borrowing!

Question 4

Nature of rural credit markets?

Answer 4

Oral (unenforceable) contracts
Long-term, exclusive relationships
IR>Formal IR (variance high)
Significant interlinkage with other markets

Question 5

Problems with rural credit: Adverse selection

Answer 5

Hidden info about the use of the loan leads to poor choice about loaning.
IR up leads to a fall in safe, rather than risky projects if E(Return) is same. (Stiglitz and Weiss 1981)

Question 6

Problems with rural credit: Moral hazard

Answer 6

Lying about the use of the loan s.t. it finances C, not I if they could have done it anyway
Ability to target loans is ‘illusory’ (Adams and Vogel 1986)

Limited liability may lead to excessive risk

Question 7

ADV of informal?

Answer 7

May have more access to information/ able to use less quantitative/official information.
Able to use less formal collateral (eg promise of labour time).

Question 8

Lender’s risk hypothesis

Answer 8

IR is high due to the risk of involuntary/ voluntary default is high

Question 9

Small loans: Costs

Answer 9

High transaction costs: 15-40% of loan size (Braverman and Guasch 1989)
Many banks: transaction costs down for ‘preferred clients’ (Adams and Vogel 1986). Repeated lending

Question 10

Small loans: Default rates

Answer 10

Cost of enforcement compared to benefit of recall often not worth is (Besley 1995)
Thus, not uncommon for more 25% of loans to be overdue (Adams and Vogel 1996)

Question 11

Problems of small loans necessitates what?

Answer 11

Institutions which mimic the advantages of informal institutions in order to solve these problems (IYER)

Question 12

Grameen bank ADV of system?

Answer 12

Positive assortative matching as punishes whole group if default (although may lead people to become over-cautious)

Question 13

Example of microfinance?

Answer 13

Grameen Bank Bangladesh

Question 14

Results of Grameen bank?

Answer 14

Increased access: 70% of borrowers and 75% of savers are women
Reached 13% of poorest households
Recovery rate is 99%

Question 15

Problem with Grameen?

Answer 15

Potentially unsustainable as initial funding from donors/bank of Bangladesh was required!