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

Kumar Aniket

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

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.

Keywords: group-lending; microfinance; savings; outreach; wealth (search for similar items in EconPapers)
JEL-codes: D82 G20 O12 O2 (search for similar items in EconPapers)
Pages: 31
Date: 2007-02
New Economics Papers: this item is included in nep-cfn, nep-dev, nep-fin and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:edn:esedps:140

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