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Unformatted text preview: de Janvry and Sadoulet 1 10/19/10 Chapter 12 Financial services for the poor Revised October 20, 2010 I. The microfinance revolution Microfinance institutions (MFI) have been created to overcome a market failure on capital markets that is particularly detrimental to the poor: because of asymmetrical information that induces adverse selection and moral hazards in borrowing, commercial lenders require borrowers to provide collateral as a guarantee that the loan will be repaid. As a consequence, capital markets fail as they are wealth constrained by the collateral requirement. For the poor, the implication is stark: even a good entrepreneur with a brilliant business idea will not qualify for a loan for lack of ownership of collateralizable assets (i.e., of assets that can serve as collateral with the lender). MFIs consist in a broad range of institutional innovations that seek ways around this problem. Typically, they will offer mechanisms by which lending can happen with minimal risk to the lender in spite of lack of formal collateral to secure the transaction. This is the microfinance revolution, a set of major institutional breakthroughs, pioneered by the Grameen Bank in Bangladesh created by Professor Yunus who received the Nobel Peace Prize in 2006, that help the poor gain access to capital. Many other institutions have followed suit such as Banco Sol in Bolivia, BRAC based in Bangladesh with offices in 14 countries, and Compartamos in Mexico (Table 1). While MFIs in developing countries originated principally with the Grameen Bank extending small loans to poor women, now numbering over seven million, MFIs increasingly go beyond credit to provide a broader range of financial services to the poor including savings, insurance, and the transfer of funds (Sengupta and Aubuchon, 2008). These services are complementary. Insurance is for instance important to help poor Take home messages for chapter 12 1. Because of asymmetrical information in time-delayed transactions, capital markets fail the poor who do not have collateral to pledge. The microfinance revolution is an effort at creating new institutions that can solve this problem without reliance on collateral. 2. The lender problem that needs to be solved has four components: avoiding adverse selection of potential borrowers, effective monitoring to reduce moral hazard in project implementation, reducing moral hazard in providing limited liability insurance , and preventing moral hazard in enforcing the repayment of loans. 3. Institutional alternatives to help the poor access lump sums of cash when needed while overcoming (at least partially) the lender problem include: moneylenders, ROSCAS, group lending, village banks, interlinked credit in value chain contracts, and individual proximity lending often with the use of credit bureau information....
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This note was uploaded on 02/09/2011 for the course ECON c171 taught by Professor Alaindejanvry during the Fall '10 term at University of California, Berkeley.
- Fall '10