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Authors
Affiliations
1 Centre for Social Studies, Surat - 395007, IN
2 Gujarat Institute of Development Research, Ahmedabad - 380 060, IN
Source
The Microfinance Review, Vol 1, No 1 (2009), Pagination: 18-39
Abstract
Formal financial institutions (FFIs) in a developing economy often fail to meet the loan requirements of the poor. It is frequently stated that the poor are non-bankable. The erroneous view is that the poor often do not have any resources, do not save, are ignorant about principles of financial management and cannot invest owing to their immediate consumption needs. The reluctant attitude of institutional credit agencies in lending to the rural as well as urban poor can be attributed to the following reasons. First, since the likelihood of default vary across borrowers and it is costly to determine the extent of risk for each borrower, formal lenders face the problem of adverse selection (i.e., the fear of selecting a bad borrower). Second, it is costly to ensure that the borrower takes actions that make repayment most likely, which in turn leads to 'incentive problem'. Third, since it is difficult to compel repayment by a formal lender, it takes the form of what can be called as the 'enforcement problem'.
