Dr. P.V. Viswanath

pviswanath@pace.edu

• The Economics of Microfinance by Beatriz Armendariz and Jonathan Morduch, MIT Press, 2nd edition.
• Chapter 2
• Chapter 3
• Chapter 4
• Chapter 5
• Chapter 6
• Chapter 7
• Chapter 8
• Chapter 9
• Portfolios of the Poor, by Collins, Morduch, Rutherford and Ruthven (Princeton University Press, 2009)
• Chapter 2: The Daily Grind
• Chapter 3: Dealing with Risk
• Chapter 4: Building Blocks
• Chapter 5: The Price of Money

Questions -- The Economics of Microfinance:

• Chapter 2: Why Intervene in Credit Markets?
1. The inability to access financial resources due to financial market failure (caused by information asymmetry and the lack of collateral) keeps many potential entrepreneurs from starting new businesses.  What are the findings of Paulson and Townsend (2004) regarding the impact of this market failure?
2. Some people, such as Bhaduri (1973) promote microfinance as a solution to the high interest rates charged by moneylenders because of their monopoly power.  According to this, there may be no market failure.  How would your strategy to introduce microfinance differ if you believed the monopoly power theory as opposed to the market failure theory?
3. Do high interest rates automatically imply monopoly and inefficiency?  Discuss the evidence on this question.
4. One of the problems that rural entrepreneurs face in obtaining financing is that of lack of collateral.  In many countries, this is because farmers don’t have title to their lands.  What evidence is there that providing title to farmers might not resolve the problem of insufficient credit?
5. Explain the adverse selection problem preventing lenders from lending to intending borrowers?
6. Explain the ex-ante moral hazard problem preventing lenders from lending to intending borrowers?
7. Explain the ex post moral hazard problem preventing lenders from lending to intending borrowers?
8. What does the empirical evidence say about the relevance of moral hazard and adverse selection in the efficient operation of credit markets in developing countries?
   
   
• Chapter 3: Roots of Microfinance: ROSCAs and Credit Cooperatives
1. Typically, where borrowers do not have access to banks, there are two extremes of financial resource availability – one, where family members and relatives make loans to each other, and the second, where loans are available from moneylenders.  In what sense are Rotating savings and credit associations (ROSCAs) in the middle of this spectrum?
2. What is the basic structure of a ROSCA?  Provide an example with numbers.
3. Explain these three motives for why ROSCAs work – the early pot motive, the household conflict motive and the commitment to savings motive.
4. Discuss the empirical evidence regarding how well ROSCAs work.
5. What are the key elements of a credit cooperative?  How is a credit cooperative different from a ROSCA?
6. How does microfinance go beyond ROSCAs and credit cooperatives?
   
   
• Chapter 4: Group Lending
1. Describe the features of the original Grameen group lending model.
2. Explain how adverse selection could be mitigated by group lending.
3. Explain how adverse selection could be mitigated even if group members do not have superior information on the other members of the group.
4. Explain the role of joint responsibility in how group lending is used to mitigate moral hazard problems.
5. Explain the role of peer monitoring in resolving the problem of ex post moral hazard.
6. Discuss the evidence from field studies on the effectiveness of group lending.
7. What are some of the limits to group lending?
   
   
• Chapter 5: Beyond Group Lending
1. Why may group lending schemes be better than individual lending schemes?
2. Why may group lending schemes be worse than individual lending schemes?
3. What are the differences between standard loan contracts offered by commercial banks and those offered by microfinance institutions?
4. Why might competition not be a good thing in microfinance, even from the viewpoint of borrowers?
5. What is the difference between soft collateral and hard collateral? Why might soft collateral be useful to lenders?
   
   
• Chapter 6: Savings and Insurance (Beyond Microcredit)
1. How can savings, credit and insurance be considered substitutes?
2. In what way does insurance, on the one hand, differ from savings and credit, on the other?
3. Why might individuals prefer expensive credit be preferred to cheaper savings? Can you explain why a person might prefer to borrow to satisfy current needs and at the same time hold money in a liquid savings account?
4. How could ROSCAs operate simultaneously as savings and borrowing devices?
5. Name at least five of the top reasons why BOP individuals borrow.
6. How do families in traditional cultures save for retirement? Why is it not working, as well, in modern times?
7. How might the non-availability of financial solutions to smooth cashflows affect BOP households real (non-financial) decisions?
8. Should microfinance institutions concentrate more on facilitating microsavings, rather than on the provision of credit?
9. For a fee, susu collectors in Ghana provide an informal means for Ghanaians to save and access their own money. This is effectively a negative rate of interest! Why not just keep your money under the pillow?!
10. What is hyperbolic discounting and why does it create a demand for disciplining devices?
11. What is mental accounting? How might a BOP woman use mental accounting to her benefit? What is a developed economy phenomenon that has been explained by the use of mental accounting?
12. What are the advantages of insuring farmers against bad weather rather than against bad harvests? When would such a plan work well, and when wouldn't it?
13. Women in many regions are less likely to hold savings accounts in banks, than their husbands. What are the reasons for such behavior, and how might it be changed?
14. Do you think that the government should subsidize microsavings initiatives? Are there positive externalities to individual microsavings?
    
    
• Chapter 7: Gender
  1. How can microfinance potentially benefit women?
  2. Why might women be better clients, relative to men, from a lender's point of view? Do you think this might argue in favor of the thesis that a focus on women amounts to exploitation of women?
  3. Is there compelling evidence that lending to women has more of a social impact than lending to men?
  4. Give at least three reasons as to why do microfinance loans to men tend to have higher default rates than loans to women?
  5. A study in Srilanka by De Mel, McKenzie and Woodruff found that average returns to capital are higher for men than for women. Does this mean that, from an efficiency point of view, it is better to give loans to men than to women?
  6. What is the empirical evidence that supports lending to women as a means of improving children's health?
  7. Could microfinance entrench gender roles? Explain.
     
     
• Chapter 8: Commercialization and Regulation
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• Chapter 9: Measuring Impacts
  1. Why is it so difficult to measure the impact of microfinance?
  2. What are some of the outcomes that you might consider in measuring the impact of microfinance?
  3. What are substitution effects and income effects? Why might these effects make it difficult to make unambiguous statements about the impact of a microfinance program?
  4. What is the difference between ITT and ToT effects?
  5. What is the meaning of selection bias?
  6. What are some reasons why there might be selection biases in trying to measure the impact of microfinance? How did Karlan and Zinman get around the selection bias problem in their study of microcredit in South Africa?
  7. You are a consultant for an MFI. Your job is to measure the impact of the MFI's microloan operations in a particular village. Since your client is interested in villagers' health, you devise a measure of personal health. You compare the average health of those who chose to take microloans and the health of those who didn't. You find that the first group scores higher and you report to your client that the program has been successful. Would you be correct in coming to such a conclusion? Explain why or why not.
  8. What are spillover effects? Why would they make it more difficult to estimate the impact of microfinance.
  9. What is the difference-of-differences method? How would you use it?
  10. You are a microfinance consultant. You MF client wants you to test the effects of their microlending program on family incomes in a particular village in the Philippines. You have data about the family income of all the families in the village before the intervention and after the microfinance program ended. You also have data about the individual families, such as the level of education, the number of family members, the number of rooms in the family's house, the level of religiosity of the family etc. Write down a regression equation that you might use to estimate the impact of microlending on incomes.
  11. Suppose you are worried that families who chose to accept microloans from your client might have been more entrepreneurial than families that didn't. Explain how this might bias your results. What might you use as an instrumental variable to remove this bias? Explain your decision.
  12. How do RCTs overcome selection bias?
  13. What are the shortcomings of RCTs? Why might they not be a panacea in overcoming selection bias?

Portfolios of the Poor:

• Chapter 2: The Daily Grind
  1. What does the high cashflow intensity of income indicate?
  2. What are the implications of high cashflow intensity for microfinance providers?  Explain .
  3. What are some of the savings mechanisms used by families in the BOP?
  4. What are some of the borrowing mechanisms used by families in the BOP?
  5. What are some of the social factors that make it easier or more difficult for people to manage their money?
  6. What are the mechanisms used in informal lending to reduce moral hazard and adverse selection issues?
  7. Why is microfinance such a small part of borrowing/lending in Bangladesh in turnover terms, even though most people do have access to it?
  8. What are the advantages and disadvantages of informal borrowing?
     
     
• Chapter 3: Dealing with Risk
1. Price is not the only, and sometimes not even the main, factor affecting demand for insurance from BOP families. What is the main factor affecting demand for insurance, if not price?
2. "For the poor, health problems are financial problems." Comment.
3. What are some of the tools South Africans use for burial insurance? Why do they use a variety of methods, instead of simply picking the least expensive tool?
4. What financial tools do diary families in India turn to, to deal with health-related emergencies? Explain their decision, by putting it in context.
5. Why is health insurance much more difficult to provide than funeral insurance?
   
   
• Chapter 4: Building Blocks

1. What are some of the purposes for which the poor use large sums of money?
2. Why did diary households seeking to acquire large sums not use savings alone? Why did they use a portfolio approach?
3. Why do BOP households typically not have long-term investments and long-term liabilities?
4. What are the systematic differences between families in Bangladesh, South Africa and India in terms of the extent to which they use savings, loans and insuance to create lump sums of money? Why do you think these differences exist?
5. Why was there more use of lump sums for business/farming purposes in South Asia than in South Africa?
6. What is the similarity between saving and lending?
7. Loans and saving are both ways of obtaining large sums. Why are loans called "accelerators" while savings strategies are called "accumulators?"
8. Some individuals studied by the authors borrowed money at high interest rates in spite of having money accumulated in liquid savings account. Why might this be a sensible strategy?
9. If you were a participant in an auction ROSCA and were interested in using it to save money, would you bid during earlier rounds or later rounds? Why?
10. Why might an auction ROSCA be considered an efficient intermediation system?
11. What are some of the disadvantages of the tools used by diary households?
    
    
• Chapter 5: The Price of Money
  1. Why do some moneylenders not explicitly compound interest on the loans that they provide?
  2. Why do some people at the BOP prefer to prepay loans even though there may be no advantage to them in terms of the interest that they have to pay?
  3. Why might the stated interest rate and the effective rate be different on loans given by moneylenders?
  4. "Interest on moneylenders' loans is better considered a fee, rather than compensation for the time value of money." Explain.
  5. Why do moneylenders not adjust interest to take into account early repayment, in full or in part?