Unformatted text preview: Credit and Microfinance If financial institutions don’t have full information about the riskiness of projects that individuals plan to undertake, they may ration credit as a means of ensuring that citizens undertake less risky projects Informal Financial Institutions Informal financial institutions may be better at dealing with informational and enforcement problems – may be able to use social sanctions to guar- antee loans as opposed to collateral requirements – allowing poor (who would otherwise be screened out of credit market due to inability to com- ply with collateral and other requirements) to gain access to credit ⇒ credit deepening – work because they deal with informational problems which confound formal credit markets. Why Intervene in Credit Markets: Market Failure Market for loans – occurs between those who are willing to postpone con- sumption and those wanting to make investments / prepone consumption – determines price of credit (interest rate) Market failure...
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This note was uploaded on 12/29/2011 for the course ECO 307 taught by Professor Dublin during the Spring '10 term at SUNY Stony Brook.
- Spring '10