IEMS Newsletter - Oct 2014 - page 1

Growing evidence suggests
that the traditional model of
microcredit has not succeeded
in reducing poverty.
In most of the developing
world, the poor are rural. Credit
that helps to raise agricultural
incomes can help them escape
The TRAIL (trader-agent-
intermediated lending) approach
leverages local intermediaries
who have information about a
farmer’s ability and willingness to
In return for a commission that
depends on the repayment
rate, intermediaries recommend
borrowers to the microfinance
institution (MFI).
In a field experiment in India, the
TRAIL scheme was more cost-
effective, had higher repayment
rates and imposed lower costs on
TRAIL loans significantly increased
agricultural incomes from high-
risk, high-value cash crops.
Helping Microfinance
Fulfill its Promise:
Raising borrower incomes through
Agent-Intermediated Lending
Microcredit is widely thought to be a
solution to world poverty and a means
to empower the poor. Yet in recent years,
evidence has emerged suggesting that
it may not deliver all the outcomes that
have been hoped for ( New Yo r k Time s ,
2011). In particular, in a number of settings,
households that receive microcredit do
not achieve higher consumption or assets
(Banerjee et al, 2014).
Why is this? Although there are many
versions of the traditional microcredit model,
in all versions borrowers self-organise into
groups and each member is jointly liable
for the loans of all group members. Loan
disbursal is sequential. Repayment typically
begins one or two weeks/months after
disbursal, with weekly/monthly repayment
instalments over one year. If any member
defaults, the entire group is cut off from
all future lending. From the MFI’s financial
perspective, microcredit has been successful;
borrowers are not required to post collateral
and yet they nearly always repay the loan.
Many people believe that this high repayment
rate is the result of product design: the
incentives are such that safe borrowers
form groups with other safe borrowers (peer
selection), monitor each other’s loan usage
(peer monitoring), impose sanctions on
those who default, and repay on behalf of
defaulting group members (joint liability).
Unfortunately, however, these same
features may be shortcomings. The rigid,
high-frequency repayment schedules and
joint liability can discourage borrowers
from investing in risky, yet potentially more
profitable, projects (Fischer, 2013), such as
diversification into high-value cash crops.
Strict repayment rules can create tremendous
pressure on borrowers to repay even when
they are unable to, and have even been
blamed for farmer suicides in some parts
of India (Bloomberg NewsWeek, 2010). The
joint liability feature can also threaten the
viability of MFIs, as seen when a religious
organisation’s 2009 ban on followers’
transactions with MFIs led to contagious
defaults (Banerjee and Duflo, 2011). The
regular group meetings and saving targets
also impose costs on borrowers, so that
often borrowers with higher opportunity
costs of time choose not to participate.
Sujata Visaria, Pushkar Maitra, Sandip Mitra, Dilip Mookherjee, Alberto Motta
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