Week 9: Microfinance Flashcards
Stylised facts (8)
Borrowing is widespread & frequent among poor despite not having access to formal credit.
Lending rates much higher than deposit rates
Extreme variability of interest rates
Low levels of default
Ex-Ante competition in credit markets
Borrow to maintain business (not expand)
Rich borrow more, and interest less
Borrow and save at same time
So if they borrow but often no formal credit, where from?
(According to Poor Economics 18 country dataset)
(name 3 sources, 4 ncluding formal)
66% people had a loan, 23% of which from relative, 18% local moneylenders, 37% shopkeeper, 6.4% formal institution
Governments have tried social lending programs, but have failed.
Give an example.
Burgess/Pande:
India 1977 - for every bank branch in the city, banks had to open 4 rural branches.
Failed as too many default rates, since social lending, rather than profit motives that would make them ensure they lend to people with good credit risk
2nd stylised fact: Lending (borrowing) rates are much higher than deposit (saving) rates
What did Ananth find for borrowing rates for Indian vegetable vendors to be?
5-10% a day!!!!
5 x 1.05³⁶⁵ = £258m over a year!!!
Compared to savings rates barely 1%
So if it is profitable to lend to the poor, why aren’t investors rushing to them with bags of money? (and competing down the interest rate?)
High capital costs for lenders
Repayment (done later) - links to asymettric info lenders face as a result to avoid repayment issues!
Aleem findings on capital cost in Pakistan
Average interest is 78.5% , capital cost is 32.5%.
So explains some of the reason why there isn’t lots of lending, but not all of it. Repayment is another!
3rd stylised facts: Extreme Variability of interest rates.
Aleema - What was the standard deviation of interest?
38.3%.
Which means 2% and 150% is possible in the same 95% confidence interval
Ghate - interest in Thailand per month
2-3% per month Central Thailand
5-7% North
Why are interest rates so variable?
To compensate for the risk of someone defaulting.
Higher default>higher interest rates.
Stylised fact 4: Low levels of default
What are the repayment rates
98%.
Das Gupta on default costs as a % of interest charges
Cost of defaulting explains 14% of interest charges.
Not a lot.
Do despite high repayment, what is a caveat
It is often delayed, and/or requires hard work on lender’s part to chase. ISSUES WITH ASYMETTRIC INFORMATION TO PICK BORROWERS (ADVERSE AND MORAL HAZARD IN NEXT SUBTOPIC OF FCS!!)
Stylised fact 5: Ex-Ante Competition in credit markets
Lots of moneylenders competing, IN TOWNS.
Since only go where expect to survive and profit, so concentrated heavily in those areas.
Stylised facts 6: Borrowing to maintain business (not expand)
Given high interest, we would expect only to use if high returns were available otherwise not borrow.
Where are loans spent if not on expansion?
Most loans are taken to finance business stock, not expand.
Timbers & Aiyar on where loans get spent
75% finances production or trade.
So if returns to regular business stock higher than interest rates (clearly since otherwise we wouldn’t use borrowing), why not save and use their own past income to finance stock rather than continually pay high interest?
Stylised fact 7: Rich pay lower interest and borrow more
What did they find average interest to fall per month by, and upon what reason?
Average interest drops by 0.4% per month for each additional hectare of land owned by borrower (i.e richer as more land)
Why do rich get lower interest rates
Collateral! So lenders willing to lend more, and at a lower rate since less of a risk.
So loan size increases with wealth, and then interest falls with loan size.
Stylised fact 8: Common to borrow and save at same time
They would do this despite lending (cost of their borrowing) rate exceeding the saving rate
Why?
Baland & Mali - found some people take on loans as a way to pretend they are poor and cannot held friends in need/repay them.
Vegetable vendors in Chennai - explain their daily process
Every morning buy vegetables on credit. (Loan 1000rs)
Pay off loan with daily revenue at end of day. (Pay back 10.50rs
They are persistent borrowers, do this process on average 28 days a month.
What % feel there is no other way of doing business i.e interest is unavoidable
64%
How much profit do they make
100 rupees
How can they escape poverty?
Save, and then borrow the normal amount - amount saved!(Since no longer need to previous amount since saved on consumption)
Continue this until we borrow less and less
So you can save your way out poverty!
Alternate method to escape poverty
Take a monthly loan opposed to daily loans
Karlan ran experiments in India and Philippines where they paid off peoples debt.
What was their intuition they believed
The idea was that
No debt so could use revenues to buy tomorrows inventory, then use tomorrows to buy next days, etc never borrow again.
Result
People went slowly back into debt (1-2 years)
So not easy to escape need for borrowing!
What are payday loans
What is interest on US payday loans
If run out of money before payday, take this loan to tide over then pay it back on the payday.
Around 18% for 2 week loans!!! 7000% annually!! So quite exploitative for people who are in this position
