Credit Constraints. A first approach to the “microfinance solution”. 1) Characteristics of credit markets in poor countries. Demand side : fixed capital, working capital, consumption ….. (not very different from those in developed countries) Supply side : -Institutional lenders
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A first approach to the “microfinance solution”
-Informal lenders in response to informational asymmetries
In turn has led to:
Segmentation, Interlinkage, Interest Rate Variation, Rationing, Exclusivity
which in turn led to various “theories” of informal credit markets
2) Why credit does not flow from rich to poor
After all, Neoclassical theory would suggest….
And interest rates faced by the poor would be exceedingly anyway for
2 Main Reasons:
In principle, the answer is yes. As mentioned earlier, from institutional sources, and from informal sources
Institutional sources, mostly development banks, where credit was subsidized. Concerns:
Pushed out informal credit suppliers
No incentives to collect poor individuals’ savings
And subsidizing interest with outside sources of credit via institutional sources was inefficient
In the mid – 1970s, in Bangladesh….
→ Transaction costs ↓
→ Interest rates were ↓
→ Repayment Rates ↑
In turn, a demonstration to donor agencies that lending to the poor could be efficient, and potentially profitable too!!
→ Next class: A-M (2005), Chapter 2