Microfinance and credit to the ultra poor

Abstract

Purpose

The purpose of this paper is to see whether Government of India is successful to make credit accessible to the poor; to examine the role of competition in microfinance sector in ensuring credit to the ultra poor borrowers; to see the role of subsidy in microfinance movement.

Design/methodology/approach

The paper is based on secondary data. This paper examines, in an analytical framework with a variety of assumptions, the role of microfinance institutes (MFIs) in bringing capital to the ultra poor.

Findings

In an attempt to make credit accessible to the poor, Government of India took several measures, but did not succeed to a significant extent. This paper has shown that the microcredit has become accessible to the “working poor,” but not to the ultra poor. Initially the model shows that in the absence of competition MFI and moneylender are equally exploitative to the ultra poor borrowers. The model further shows that in the presence or absence of competition in the credit market, credit may be accessible to the ultra poor borrowers under certain conditions. Excessive subsidies might drive out the poor borrowers from the microfinance sector.

Originality/value

For the poor clients served by the microfinance institution, the argument goes, the access not the cost (interest rate) that matters (Robinson, 2001). Here the implicit assumption is that the interest rate elasticity of demand for micro credit is close to zero (Emran et al., 2006). In an interesting paper Deheja et al. (2005) has shown that the interest rate elasticity of loan in the microfinance system is significantly negative. The author is of the opinion that this is the cost of credit as well as inability to pay a minimum price of credit, which denies the access to credit.

Citation

Kusum Mukherjee, A. (2014), "Microfinance and credit to the ultra poor", International Journal of Social Economics, Vol. 41 No. 10, pp. 975-993. https://doi.org/10.1108/IJSE-03-2013-0064