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Savings, Lending Rate and Skill Improvement in Microfinance Operating through Public-Private Cooperation

Amit Kundu ()

The IUP Journal of Managerial Economics, 2011, vol. IX, issue 4, 33-51

Abstract: In this paper, microfinance program through joint liability credit contract is explained with the help of a two-stage game when the program is operated by a non-motivated NGO with the help of a commercial bank and government. It is observed that even in the presence of public-private cooperation and back-ended subsidy provided by the government, both individual sanction as well as social sanction play an important role of security against credit for proper functioning of the program. Non-homogeneity among the group members may allow the socially powerful member to force her less powerful co-member to repay her debt with interest and enjoy a free ride by taking advantage of the joint liability. It is also proved that the non-motivated NGO, who itself plays the function of the self-help group, can offer credit to the group members at lowest possible rate of interest and arrange sufficient training for the group members for skill improvement after group formation, if, and only if, it gets sufficient financial support from the government in the initial period and if the linked commercial bank charges low lending rate to the group in credit-linkage program. This will in turn encourage each group member of the respective groups to enhance compulsory savings in each installment in both the periods, which ultimately will help her to get a higher amount of credit in each period and thus improve the consumption of the member household progressively.

Date: 2011
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Handle: RePEc:icf:icfjme:v:09:y:2011:i:4:p:33-51