Dr. P.V. Viswanath

pviswanath@pace.edu

• Quiz 1
• Quiz 2
• Quiz 3
• Quiz 4
• Quiz 5
• Quiz 6
• Quiz 7
• Quiz 8

Quiz 1

Notes:

1. Give three uses that microcredit borrowers have for their loans.
2. The main problem that leads people to borrow is that, because of cashflow volatility, their cashflows at a given time, might be insufficient for their needs at that time.  What are two potential alternate solutions to this problem?
3. What are the problems with subsidized loans?

Quiz 2

Notes:

1. What are the three main motives of joining a ROSCA – list all three and explain any one in two sentences.
2. Early pot recipients in a classic ROSCA would seem not to have any advantage in staying in the ROSCA and continuing to contribute.  How can this problem be solved?
3. Explain briefly how a credit cooperative is supposed to work.

Quiz 3

Answer any two only using this side only:

1. Why is microfinance such a small part of borrowing/lending in Bangladesh in turnover terms, even though most people do have access to it?
2. What are the implications of the high cashflow intensity of income?
3. What are the mechanisms used in informal lending to reduce moral hazard and adverse selection issues?

Quiz 4

Answer any two only using this side only:

1. Why is insurance so much important for people at the BOP than for richer people?
2. How do people at the BOP deal with extreme cashflow events?  Give examples from South Africa and from South Asia.
3. What are the advantages and disadvantages of tying insurance contracts to microcredit?

Answers:

1. Insurance is much more important for people at the BOP because they live so close to the tipping point. For example, a serious illness could cause them to dip into their entire life's savings and wipe them out altogether, without any guarantee of a cure. Then, if they die, their survivors would descend into real poverty. It is not simply an issue of not having money; the lack of money would mean that they couldn't spend on health, either; rather, it's the fact that they have no way of securely saving up for a major negative event, and the failure to do this can be catastrophic for BOP families, in contrast to better-off families, for which it would be a very bad event, but not one they could not climb out of.
2. People at the BOP often deal with extreme cashflow events -- primarily negative ones -- by buying insurance. This can be formal, as the purchase of a life insurance policy from the Life Insurance Corporation of India (LIC) or the purchase of burial policies (in South Africa). Or, it could be informal, as in the case of burial societies (in South Africa) and social insurance (where friends and neighbors might contribute to families that experience unexpected illness).
3. The disadvantage of tying insurance contracts to microcredit is that it reduces the number of people who can benefit from insurance; a big advantage is that collecting premiums becomes much easier. Also, the credibility of the insurance company is bolstered if it is tied to a trusted MFI; since the MFI is in the position of collecting repayments on loans, it is unlikely to disappear overnight, as an insurance company which is has net promised outflows. Also, the insurance company has more information about the insured, which can reduce the problem of adverse selection.

Quiz 5

Answer any two only using this side only:

1. Why did diary household seeking to acquire large sums not use savings alone? Why did they use a portfolio approach?
2. Loans and savings are both ways to obtaining large sums. Why are loans called "accelerators" while savings are called "accumulators?"
3. Why might an auction ROSCA be considered an efficient intermedition system?

Answers:

1. There are costs and benefits of the different methods. For example, with savings, there is not always security, since formal savings banks are not always available and there might be social pressures to lend out savings to friends and family. On the other hand, borrowing can be expensive. Sometimes there are emergencies, and then, loans are the only way of obtaining the funds.
2. Loans are called accelerators because they generally require quick repayment and impose more discipline. Hence the rate of accumulation of funds through the forced saving that loans entail is much faster; hence they are called accelerators because they accelerate the savings rate. Savings, on the other hand, simply accumulate sums of money, but not necessarily at a quick pace.
3. An auction ROSCA allows the person with the most productive investment projects to outbid competitors ensuring that the funds are channeled to their most productive use. Furthermore, there is no intermediary needed.

Quiz 6

1. What can you say about the kinds of entrepreneurs that Kiva Zip is likely to serve?
2. Kiva Zip seems to be an amazing way of getting funds to deserving entrepreneurs.  Why do you think Grameen is not doing the same thing?  Do you think Grameen should switch to the Kiva Zip model?  Why or why not?

Answers:

1. Kiva Zip requires entrepreneurs who are at least somewhat web-savvy, since it works through the internet. According to what Sulin Lau told us, it also requires that these intending borrowers should have Paypal accounts. While this is likely to cut down on scams, it also means that borrowers will have to be somewhat sophisticated and are unlikely to belong to the unbanked sector.
2. Grameen is targeting a very different audience. It is looking for people without credit scores, without bank accounts and without much business savvy. It aims to provide these elements to the borrowers through the group experience. Hence Grameen's switching to the Kiva Zip method would be counterproductive. Grameen's borrowers are likely to be poorer, while Kiva's are likely to be better-to-do, if we take into account the size of the initial loan, which is $1500 for Grameen and about $4000 or so for Kiva Zip, judging from some of the examples on their website. In answering this question, it is important not to simply talk about differences in terms of how Grameen and Kiva Zip operate. Of course that is difference; that's the question, should Grameen move to Kiva's operational style? The answer has to be in terms of their differences in goals.

Quiz 7

1. The Risk Coverage Ratio is defined as the ratio of Loan Loss Reserves to the sum of Outstanding Balance on Arrears over 30 days and Refinanced Loans.  What is the purpose of this ratio?  Can you explain why Refinanced Loans are added to the denominator in the definition of this ratio?
2. Grameen Bank and some other MFIs do give loans for non-productive purposes.  In Portfolios of the Poor, we saw that families often need loans to take care of school tuition of healthcare expenses.  That being the case, why does Microrate define microcredits as loans for productive purposes?

Answers:

1. The Risk Coverage Ratio shows what percent of the portfolio at risk is covered by actual loan loss reserves. It is easy, at least in the short term to hide non-performing loans by giving the borrower another loan or allowing him/her to refinance a previous loan. That is why Refinanced Loans are added to the denominator.
2. Microrate defines microcredits solely as loans for productive purposes because its financial ratings are meant for investors interested in a financial return, not a social return.

Quiz 8

1. Why might it be difficult for minority entrepreneurs to tap into the resources of venture capital funds and private equity?
2. What are the three elements of an impact thesis (i.e. the investment philosophy of an impact investment fund) according to the JP Morgan paper,“A Portfolio Approach to Impact Investment” by Yasemin Saltuk?  What might you add or subtract from this list?

Answers:

1. Partly because of historical and existing entrenched attitudes and regulations, minorities in the US tend to score lower on home ownership, education and college education; they also do not have inherited wealth. This means they have little collateral and also no ability to seek out existing funds sources. Networking is also an important component in accessing private capital, since evaluation of the entrepreneur/management is crucial to a successful venture investing strategy.
2. The impact thesis is the investment philosophy of the fund/organization. This will usually include these elements:
   1. A target population, which could be defined by income level, degree of inclusion or access, or other characteristics.  Examples might be BoP, underserved areas, rural areas, specific countries etc.
   2. A target business model of impact delivery, which focuses the investment opportunity set on certain business models.
   3. Target impact, which can be measured to determine the success of the intervention

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