In the 2010 article Giving Credit Where It Is Due by A. Banerjee and E. Duflo, t
ID: 1202659 • Letter: I
Question
In the 2010 article Giving Credit Where It Is Due by A. Banerjee and E. Duflo, the authors present a number of facts and interpretations on the workings of informal credit markets in less developed countries. Based on these facts, the authors pose the following two questions: (1) Is access to reasonably priced credit really a problem for the poor? (2) What are the sources of inefficiency in credit markets? Based on the readings and the discussion in lecture, briefly discuss the main arguments and the economic evidence for each question
Explanation / Answer
(1) Is access to reasonably priced credit really a problem for the poor?
Most people in the developing countries hardly have access to formal credit and mostly relu on informal credit. It is estimated that no more than 6 percent of the funds borrowed by the poor came from a formal source. A vast majority of rest of the loans came from local markets, moeny lenders or friends.
Informal credits are characterised by high lending rates relative to deposit rates, can vary widely within the local market, richer people borrow huge sum at lower interest, and people with few assets do not borrow at all.
(2) Rural credit markets in developing countries are quite different form other countries. The three distinguished features here are collateral security, underdeveloped complementary institution, and covariance risks. Collaterals are usually hard to come by in rural credit markets, because the borrowers are too poor to have assets. Poorly developed communication in rural areas can make the use of formal bank arrangements costly for many individauls. Covariance is related to income shocks that are caused due to weather fluctuations. Such shocks affect the operation of credit in rural markets.
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