Does Subsidising the Cost of Capital Help the Poorest? An Analysis of Saving Opportunities in Group Lending

This paper argues that subsidizing the cost of capital restricts the ability of the poorest to participate in the group lending mechanisms that offer opportunities to save. The paper:

• Documents the group-lending mechanism used by a typical microfinance lender in Haryana, India, and offers the following information about the program;
• Analyzes the effect of offering savings opportunities within the group-mechanism on the depth of outreach achieved by the mechanism.

It finds that:

• Groups have significant heterogeneity within them;
• An individual can participate in the group either as a borrower or as a saver;
• The lender requires that the borrower partly self-finances her/his project with her/his own cash wealth;
• Consequently, a borrower requires a minimum amount of cash wealth to borrow;
• The poorest participate in the group by co-financing the borrowers project with their meagre savings;
• In return, they obtain higher than market returns on their savings.

The paper concludes that:

• Subsidizing the cost of capital reduces the cash wealth required to participate in the group as a borrower;
• It also increases the cash wealth required to participate in the group as a saver, thus curtailing the opportunity for the poorest to enrich themselves.