Enlighten Mind

Credit III The Classic Microcredit Model       This section introduces the structure and key features of microfinance , especially in the context of moral hazard and institutional design. Here’s a concise breakdown: Key Features of Microfinance Institutions (MFIs): Target Borrowers: Typically lend to women (though some also lend to men). Focused on very poor individuals or households. Loan Structure: Small initial loans , e.g., $200. Repaid in frequent, small installments (e.g., weekly $4.80 payments for 50 weeks). Loan size increases slowly over time (~10% real growth per year), providing dynamic incentives . Group Lending with Joint Liability: Borrowers are grouped (e.g., 5–10 people). Joint liability means members are responsible for each other’s loans. In practice, this is often enforced via future loan eligibility (not legal action). If one defaults, others may be denied future loans . Meetings and Monitoring: Regular group me...

 Credit II Understanding Credit Constraints     This opening segment of Lecture 2: Credit Part 2 picks up from the earlier theoretical discussion and sets the stage for the empirical investigation into the nature of credit constraints for the poor. 📌 Section Summary: Framing the Supply vs. Demand Constraints in Credit Markets 🔁 Recap of the Previous Model Last time, we saw that: Poor borrowers can only be lent very small amounts (due to incentive constraints). Fixed costs of monitoring make these small loans very expensive per dollar lent . That leads to very high interest rates , even in competitive, no-default settings. 🧠 Example: If it costs $1 to monitor and you only lend $1, then you must charge at least 100% interest to break even. ❓ New Question: What Kind of Constraint Is This? Banerjee now sets up the core empirical puzzle for Lecture 2: Are poor people credit-constrained because they are unwilling to borrow at high rates ? → Dem...