Paper

Banking with Sentiments: A Model of Fiduciary Interactions in Micro-Credit Programs

Reasons for the success of microfinance programs
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This paper provides explanation for the high rate of loan repayment observed in Grameen Bank, as well as in many other microfinance institutions (MFIs). The paper describes the following basic characteristics of a microcredit program using an example of Grameen Bank:

  • Presence of minimum five members;
  • Joint liability by group for credit taken by the members;
  • Repayment of loans on weekly basis;
  • Agreement within group members to respect rules.

The paper compares the microcredit programs with traditional practices and states that:

  • In the formal credit system:
    • People providing collateral have access to formal credit system;
    • Lenders are protected from insolvency.
  • In financial institutions such as the Grameen bank:
    • Risk of insolvency seems to be higher;
    • Relationship with the borrower is based on trust.

It proposes different explanations for the success of microfinance programs including:

  • Borrowers' need for repetitive loans;
  • MFIs':
    • Relying on pre-existing social norms, culture, religion and other social collaterals;
    • Fostering a credit conducive culture;
    • Forming groups bound by joint liability.

The paper presents a model based on trust responsiveness that accounts for the trustworthy behavior of borrowers repaying the loan. It analyzes three well known psychological effects consistent with the model explaining borrowers trustworthiness:

  • Framing effect;
  • Crowding out mechanism;
  • Feeling of freedom effect.

About this Publication

By Pelligra, V.
Published