The Creditworthiness of the Poor: A Model of the Grameen Bank
This paper analyzes the role of expected income in entrepreneurial borrowing through the case of Grameen Bank. It states that the poor are safer borrowers because they value the relationship with their bank.
Microfinance programs like the Grameen Bank achieve high repayment rates though their borrowers are poor and provide no collateral. This paper studies the dynamics of a monopolistic bank granting loans and accepting deposits from entrepreneurs with different expected income levels. The study supports its theoretical findings with empirical data and draws the following conclusions:
- Microfinance banks increase current and future income of individuals by providing investment opportunity and savings technology;
- Poorer individuals aim for higher repayment rates to maintain relationship with the bank and benefit from saving;
- Borrowers with better external options are more prone to default;
- During transition to a steady state, banks reinvest all profit in increasing loan supply;
- Banks profit by lending to groups with fewer external options.
The policy implications of these findings include the need to focus on poorer individuals and introduction of microfinance programs in places with few institutions offering credit and savings.