Question

Microfinance and Group Lending While back in Les Cayes, Daniel meets with some members of a microfinance group called Tree of Life. They discuss a Group Lending contract that Tree of Life uses to offer lower interest rates on loans to clients. Tree of Life only offers loans to members of microfinance groups in the community, who are jointly liable for paying back the loans. While Daniel doesn’t know which member of the community is RISKY or SAFE, members of the community have a better grasp on this. Members of the microfinance groups share the costs of the loans and their project revenues. For this reason, the groups tend to have more SAFE farmers than the surrounding community: the groups are made up of about 75% SAFE farmers and 25% RISKY farmers.

a) Let denote the income of a farmer in a microfinance group. Derive an expression for , the expected incomes of one of these farmers. Report your expression in intercept-slope format as in the questions above.

b) Let denote the profit a lender receives from lending to a microfinance group in Camp-Perrin, on a per individual basis. Derive an expression for E(), the expected profit of the lender. Report your expression in intercept-slope format as in the questions above.

c)Suppose Tree of Life was the lender in Camp-Perrin. Having a mission to use microfinance for social good, the organization don’t beave like a regular monopolist. What is the lowest interest rate they could charge to these microfinance groups and still break even?

d)What is the expected income of one of the farmers in the microfinance group at this interest rate?

e)Daniel is a coldhearted capitalist who has no interest in lowering his interest rates, but he realizes he may be able to earn more by lending to the microfinance groups with a joint lending contract. What is the highest interest rate he could charge to this groups of farmers?

f)What is Daniel’s expected profit at this interest rate?

Answer 1

a)Normally the interest rates charged by the micro finance groups are about 12 to 15% interest rates. from the above statement we can estimate that the farmer expected income is 10000 per month. if the loan amount is 50000 per year, the farmer has to pay an amount of 4166 each month per year.

b). Here the lender can receive a profit of Rs.5000 on amount invested of Rs. 50000.

c) If Tree of Lie was the lender in Camp-Perrin having a mission to use micro finance for social good then the interest rate which they can charge is 8 to 10%.

d) at this interest rate the expected income of the farmer is Rs.8000 per month.

e) If Daniel is a cold hearted person then he could charge to this group of farmers at an interest of 15 to 20%.

f) Now Daniels expected profit can be Rs.7000 on amount of Rs.50000.