Does Subsidising the Cost of Capital Help the Poorest? An Analysis of Saving Opportunities in Group Lending
This paper shows that subsidising the cost of capital restricts the ability of the poorest to participate in the group lending mechanisms that include saving opportunities. We document the group lending mechanism used by a typical microfinance lender in Haryana, India. Individuals can participate in the group either as a borrower or a saver. The lender requires that the borrower partly self-finance their project with their own cash wealth. Consequently, a borrower requires a minimum amount of cash wealth to borrow. The poorest participate in the group by co-financing the borrower's project with their meagre savings. In return, they obtain higher than market returns on their savings. Subsidising the cost of capital reduces the cash wealth required to participate in the group as a borrower. Conversely, it increases the cash wealth required to participate as a saver, thus curtailing the opportunity for the poorest to enrich themselves.
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