A Matching of Two Promises: Microfinance And Social Responsibility
This document discusses how socially responsible (SR) investors in Italy and other European countries are willing to accept low deposit rates for their savings when they know that their money is being used for the development of microfinance institutions (MFIs) in their country. This paper analyzes the effects of the SR savings in microfinance schemes on:
- Borrowers' welfare;
- Loan conditions under different assumptions that include:
- Borrowers' types;
- Borrowers' moral hazard;
- Group size.
The paper presents the model in which MFIs can choose among different lending strategies to insure themselves against borrowers' failure. This includes lending:
- Directly to borrowers and using a liquidation contract and monitoring them;
- Directly to group and using a liquidation contract;
- To a large financial intermediary.
The paper further analyzes the impact of SR savings on group lending by considering two alternative uses:
- Direct reduction of borrowers' lending rates;
- Replacement of microfinance deposit insurance schemes.
The paper also examines the effects of the MFI choosing one of the following options for utilization of SR savings:
- Transfer the reduced cost of funds on borrowers and insure with external agency;
- Build a guarantee fund to eliminate the external insurance.
The paper concludes that overall socially responsible savings enhance the role of inclusion and value creation of MFIs.
