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The Microfinance Background

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MicroFinTech

Part of the book series: Palgrave Studies in Financial Services Technology ((FST))

Abstract

This chapter analyzes the microfinance background to provide a framework for MicroFinTech applications. The description starts with an analysis of the economic lives of the poor, showing why traditional banking is unfit for their needs. The key features of microfinance are described, together with its governance concerns.

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Notes

  1. 1.

    See Armendariz De Aghion and Morduch (2010).

  2. 2.

    See Thi-Hong et al. (2021).

  3. 3.

    See Özcan (2020).

  4. 4.

    The link between poverty and underpopulation is well-known since dispersion and distance from schools, hospitals, and other main services, together with lack of infrastructures, are major obstacles to social and economic development.

  5. 5.

    Lack of energy and frequent power shortages requiring emergency generators represent a common and serious problem.

  6. 6.

    See Kapuscinski (2003).

  7. 7.

    See also Sing et al. (2021).

  8. 8.

    See Armendariz De Aghion and Morduch (2010).

  9. 9.

    See Newman et al. (2017).

  10. 10.

    See Patrick and Squires (2021).

  11. 11.

    Local names for ROSCAs range from hui in Taiwan to tontines in rural Cameroon to polla in Chile, tanda in Mexico, chit funds in India, kye in Korea, arisans in Indonesia, susu in Ghana, esusu in Nigeria…

  12. 12.

    Friedrich Wilhelm Raiffeisen is a remarkable example of social entrepreneur. See Achleiter (2008).

  13. 13.

    See Armendariz De Aghion and Morduch (2010).

  14. 14.

    Empirical evidence about group lending is surveyed in https://www.indianjournals.com/ijor.aspx?target=ijor:sjdm&volume=19&issue=2&article=003.

  15. 15.

    Song et al. (2014).

  16. 16.

    The standard methods of overcoming adverse selection are to have increased information to improve risk evaluation, as Akerlof (1970) has pointed out in his seminal paper.

  17. 17.

    See Armendariz De Aghion and Morduch (2010).

  18. 18.

    Borrowers, if allowed to form their groups, will sort themselves into relatively homogenous groups of “safe” and “risky” debtors. Without dynamic incentives, a safe borrower will value having another safe borrower as a fellow group member more than a risky borrower will value having a safe borrower as a peer since a risky borrower has a greater probability of defaulting and thus a lower probability of having to pay back the debts incurred by his peer, should he default.

  19. 19.

    For a survey of the literature, see Milana and Ashta (2012) and Garcia-Perez et al. (2017).

  20. 20.

    See Deutsche Bank (2007, p. 6).

  21. 21.

    Moss et al. (2015).

  22. 22.

    With possible negative effects since due to short repayment time, MFI risk steep deterioration of their portfolio in a matter of weeks only. Short repayment installments bring to a financial—and cultural—lack of long-term planning, which discriminates riskier projects with longer gestation.

  23. 23.

    Grameen Bank II model has abandoned this model, recognizing its negative aspects, such as the free-rider problem, according to which a bad borrower has an obvious incentive to join safer ones.

  24. 24.

    See https://www.elgaronline.com/view/edcoll/9781788118460/9781788118460.00016.xml.

  25. 25.

    Attendance at meetings has also other positive side effects and is a public screening of the conditions of the women (frequency of participation has of course proven lower in abused women).

  26. 26.

    See Rahman et al. (2017).

  27. 27.

    There are several possible combinations, which show how the model is flexible and adaptable to different circumstances: the delinquency of one member can hit either him alone, with no access to further credit installments, or the whole group; in the latter case the monitoring incentive is stronger, but the penalty is high and somewhat unfair for the good members.

  28. 28.

    A weekly collection of money by credit officers is a high cost, particularly in underpopulated areas.

  29. 29.

    If relatives and enlarged clan members are particularly demanding, borrowing might be a better solution than saving, to prevent “expropriation” and to justify refusals to accord them embarrassing loans.

  30. 30.

    See Banerjee and Duflo (2007, p. 156).

  31. 31.

    Many people, rich or poor, are reluctant to buy insurance because they do not want to think about loss, illness, or death. Still, the low-income market may be particularly disinclined to purchase insurance for several reasons:

    • The poor often lack familiarity with insurance and do not understand how it works;

    • Until one receives a claim payout, insurance benefits are intangible; it is challenging to persuade someone to part with their limited resources to buy peace of mind;

    • If the poor do not have to claim, they may believe that they wasted their precious income;

    • Often the poor have a short-term perspective, only making financial plans a few weeks or months into the future;

    • If the low-income market is familiar with insurance, they may not trust insurance providers.

    Source http://microfinancegateway.org/resource_centers/insurance/focus_notes/_note_1.

  32. 32.

    See Armendariz De Aghion and Morduch (2010).

  33. 33.

    See Deutsche Bank (2007, p. 4).

  34. 34.

    Dynamic incentives, such as access to additional loans, prove useful in reducing the strategic default option.

  35. 35.

    This is the case in Bangla Desh, where up to 95% of the clients of Grameen Bank are women but not elsewhere, for example in sub-Saharan Africa …

  36. 36.

    A multi-role stakeholder simultaneously occupies different positions, and he can act as a shareholder, lender, borrower, worker, manager. This context is typical in cooperatives (even credit cooperatives). Corporate governance problems might arise if the multiple stakeholder interests are not properly known outside, due to information asymmetries, and he has an undeclared and hidden prevailing interest, potentially harmful for the other players.

  37. 37.

    Technology can also help to reduce interest rates. See Vong and Song (2015).

  38. 38.

    http://customerthink.com/my_personal_definition_of_business_with_customer_value_co_creation/.

  39. 39.

    Stiglitz and Weiss (1981).

  40. 40.

    See www.islamic-banking.com/. For an analysis of Islamic Microfinance, https://www.sciencedirect.com/science/article/pii/S0305750X20302576.

  41. 41.

    See also the reported statistics on MicroBanking Bulletin, www.mixmbb.org/.

  42. 42.

    See Hudon et al. (2020).

  43. 43.

    For market price conditions and setting standard comparisons within the microfinance industry around the world, see http://mftransparency.org/.

  44. 44.

    Armendariz De Aghion and Morduch (2010).

  45. 45.

    Armendariz De Aghion and Morduch (2010).

  46. 46.

    See also Engels (2010).

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  1. Catholic University of the Sacred Heart, Milan, Italy

    Roberto Moro-Visconti

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  1. Roberto Moro-Visconti
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Correspondence to Roberto Moro-Visconti .

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Moro-Visconti, R. (2021). The Microfinance Background. In: MicroFinTech. Palgrave Studies in Financial Services Technology. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-80394-0_2

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