Professional Documents
Culture Documents
Microfinance
and
Credit Markets
Credit A private good both
excludable and rival
Problem of information asymmetry >
high cost of credit
High interest rate -> Less surplus to pay
back to the lender
Rationing of credit
Small and marginal farmers left out
Market failure
GRAMEEN BANK
Nobel Peace prize wining microfinance
organization founded by Mohammad Yunus in
Bangladesh.
Principle-Loans are better than charity.
Loans offer people opportunity to invest in
agriculture and small businesses.
Objective-to promote financial independence
among the poor
Provides microfinance to the poor people in rural
areas.
Gives uncollateralized loans.
GB targets poorest of the poor, Women receive
95% of bank loans
A study of the World Bank says 5% of GB account
LOAN TYPES
Challenges faced:
1995 boycott
- Problems by male chauvinists and
political groups
- Repayments were slow to recover as no
significant consequences
1998 floods
- Old loans repayment affected and
defaults.
- Loans were not written off, additional
burden
Failures of Microcredit
Institutions
70 people in Andhra Pradesh, Indias fifth-most populous
state, committed suicide in 2010 to escape payments.
Micro lending was also blamed for riots, breaking up
communities.
An oversupply of credit made lenders less selective about
their borrowers, giving loans to people who used the
money for unproductive purchases and defaulted later.
A large part of the decline can be attributed to strict
regulations that took effect after the slew of suicides.
Group model of microlending, which provides a lump sum
for a cluster of people, has lost credibility; leaving it to the
borrowers to decide how the loan will be distributed
among the members and hence, causing distortions.
Thank You