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Does Subsidising the Cost of Capital Help the Poorest? An Analysis of Saving Opportunities in Group Lending

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Abstract

Saving opportunities can only be offered in group-lending by restricting the number of borrowers in a group, thus creating intra-group competition for loans. Our model predicts that this would lead to negative assortative matching along wealth lines (the wealthy would group with poorer individuals). We find that in a two member group, the borrower's wealth threshold for joining the group would be greater than the non-borrower's wealth threshold. The non-borrower's wealth threshold increases and the borrower's wealth threshold decreases with the cost of capital, thus widening the gap between the two thresholds. We thus highlight the two countervailing effects of subsidising the cost of capital, i.e., the trade-off between raising the wealth threshold for joining the group as a non-borrower and decreasing the expected time it would take to loosen the wealth deprived non-borrower's credit constraints.

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  • Kumar Aniket, 2007. "Does Subsidising the Cost of Capital Help the Poorest? An Analysis of Saving Opportunities in Group Lending," Edinburgh School of Economics Discussion Paper Series 140, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:140
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    Cited by:

    1. Beatriz Armendáriz & Ariane Szafarz, 2011. "On Mission Drift in Microfinance Institutions," World Scientific Book Chapters, in: Beatriz Armendáriz & Marc Labie (ed.), The Handbook Of Microfinance, chapter 16, pages 341-366, World Scientific Publishing Co. Pte. Ltd..
    2. Roy, Jaideep & Chowdhury, Prabal Roy, 2009. "Public-private partnerships in micro-finance: Should NGO involvement be restricted?," Journal of Development Economics, Elsevier, vol. 90(2), pages 200-208, November.
    3. Koen Rossel-Cambier, 2011. "Is Combined Microfinance an Instrument to enhance Sustainable Pro-Poor Public Policy Outcomes?," Working Papers CEB 11-013, ULB -- Universite Libre de Bruxelles.

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    More about this item

    Keywords

    group-lending; microfinance; savings; outreach; wealth;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy

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