Microcredit Discussion

Question 1

What is microfinance not suitable/cater for?

Answer 1

Not suitable for risky investments- since group members strongly discourage risk since joint liability.

Not suitable for projects where income generation takes time - since repayment starts after a week

Question 2

1st point: Why is the unsuitability for risky investments bad?

Answer 2

Creates culture pushing zero-default target - so people don’t take risks, not entrepreneurial.

So micro finance only suitable for basic low return safe businesses

Question 3

2nd point: unsuitable for projects with later income generation.

Field/Pande experiment to solve this

Answer 3

2 month grace period before repayment

Question 4

Findings (3)

Answer 4

Business investment increases

Long run profits increase (so people are taking riskier opportunities since have time to build them!,

but defaults also increase by 8% (as expected since riskier so potential to fail)

Question 5

So should MFI loosen the zero-default target?

Answer 5

Probably not since social capital equilibrium is fragile. If some stop repaying others stop.

Question 6

Andhra case on fragile social capital as collateral being a reason MFIs should not loosen their zero default target

Answer 6

Borrower suicides meant uncertainty over repayment - completely stopped within weeks.

Hence why MFI should maintain 0 default target to prevent collapse

Question 7

Another disadvantage of social capital

Answer 7

Invasion of privacy and independence - other group members want to know what’s happening with others money.

Andhra also found farmer suicides due to excess repayment pressure - peer pressure an issue

Question 8

Czura; pay, peek, punish. What was this idea about?

Answer 8

Borrowers internalised the MFI indoctrination of what constitutes a good borrower: repaying loans & disciplining peers.

Social pressure - peers punish non-repaying borrowers even if they observe he has suffered a shock