Borrower Empowerment and Savings: A Two-Stage Microfinance Scheme

This paper focuses on the linkage between microfinance and borrower (women) empowerment and the role of savings in microfinance. The paper examines a dynamic, two-stage microfinance lending scheme with moral hazard, endogenous group formation and joint-liability, where the provision of credit is conditional on prior savings, it examines the impact of such a scheme on the allocation of loans between strongly and weakly empowered borrowers. The authors find that:

• As long as the borrowers are not too similar with respect to their level of empowerment, an increase in the prior savings requirement increases the incentive for homogenous group formation;
• The savings requirement can be used as a tool to weed out weak borrowers;
• For intermediate values of the rate of interest, group lending is feasible, while individual lending is not;
• If the rate of interest is high, then individual lending may dominate group-lending.

The paper offers the following conclusions:

• ‘Strong borrowers (S) have a greater chance of being empowered, in terms of control over household income;
• Group formation leads to ‘positive assortative matching (PAM);
• Savings requirement performs two roles:
  • It affects the incentive for SS-type group formation;
  • It can be used to screen out the weak borrowers.
• As a policy tool, the savings pre-requisite needs to be used with care, since an increase in the savings requisite may lead to negative assortative matching.