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Micro-Finance GSL

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Thomas Tutor

on 27 April 2010

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Transcript of Micro-Finance GSL

MIcrofInance Group Lending Game (6, 7, 7) (6, -6, 20-s) (6, 20-s, -6) (-20, 20, 20) (0, 0, 0) Payoffs: (MFI, B1, B2) S = social sanctions Macroeconomic Diagram Inputs S D S D Final Goods
and Services Firms Households S D Loanable Funds Investment Saving Q. r. Q r% = Level of Investment How do you finance?
personal wealth
families wealth
local money lender
pawn shop
The Exchange
Lender Borrower $ at t=0 $(1+r) at t=1 action: invest Exp. MB: r
Exp. MC: $ Is this exchange worthwhile? (Borrower's W to P) - (Lender's OC) = gains from trade (total surplus) (R - $) - (cost of capital) = cost of servicing the loan Borrower: (R - $ - r) Lender: (r - OC) Distribution of the gains: forgone opportunity Information Problems Adverse Selection What is the Borrower's Type? "high" quality (safe)
"low" quality (risky)
Due to time delay between receiving loan and repayment, borrower has incentive to be risky indicate a higher W to P than safe borrower if the WtoP of Risky > WtoP of Safe interest rates (r) and r > WtoP of Safe Only Risky clients will remain Moral Hazard Once money is lent how will it be used? Little (if any) collateral to lose for the borrower Limited Liability Incentive to be risky Probability of default Consumed instead of invested
Enforcement Will I get paid back? Answers
Transactions costs If TrC > gains from exchange No loan occurs Market Failure: whenever mutually beneficial
exchanges are precluded by TrCs ( ) MFI Borrower
One Lend Don't Lend Repay Don't Repay Borrower
Two Repay Don't Repay Borrower
Two Repay Don't Repay General Methodology:
high rate of repayment How?
Dynamic Incentives Incentive Contracts for
Loan Officers Group Lending Increase size/number succesful repayment of future loans Through Reward Effective Officers Self-Information Sorting MFI Borrower
One Borrower
Two B1 must cover
B2 default B2 does not repay and faces social sanctions In a Repeated Game Both B1 and B2 have an incentive to repay The association of Social Advancement The ASA asa means hope in Bengali Bangladesh Cost Efficient, Sustainable, and Fast Growing Microfinance F Nance Established 1978 Lends to borrowers who make less than $1 a day Individual loans (not group) Accepts savings from members Re-Lends savings to other members "We are not minimalists, we are specialists; that's why we have such low costs. Our growth is spectacular because we only have one product. We are like a loan factory." Founder and Managing Director Shafiqual Haque Choudhury Flat interest rate of 16% Has no owner - "We are still an NGO. It takes time with government to be formal. If we are informal, we have less government regulations and supervision Simplicity: Three Questions for Job Interviews What is poverty? Who are the poor? How do you identify them? The Henry Ford of Microfinance 2.3M Borrowers 99.35% Repayment Over 8,000 Employees 12,000 Branches Costs per dollar lent = $0.37 By T.L. Tutor and Brian Downing Micro
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