Take Home MT#1 DEV 572 Fall 07 RFd

(Total 50 points)

Instructions: Your answers have to be submitted in the next class (Tuesday

20/11/07). You are supposed to solve the problems on your own. If your answers do
not reflect your originality than both the original and copied answer would receive
significant reduction in grades as penalty.

1. Labour Bank, a commercial bank with a nationwide presence in the country, is

expanding its services to better fulfill its mission of “providing financial services to all”.
In doing so, it has set up a separate microcredit operation within its existing banking
structure. It plans to offer a single working capital loan product to its clients nationwide,
through its existing banking structure. The loan will require collateral. The bank is
launching the programme in all its branches at once, in both rural and urban markets.
Which principles of microfinance do you think that undertaking this microcredit
operation might violate? Why? (10)

2. Read the following scenario about a microfinance client, her needs and the lending
methodologies available to meet those needs. (20)

You are a single mother, raising three children who attend a local primary school: Your
household also includes your elderly mother and a brother who is currently out of work. You
work as a seamstress from your home, as your main economic activity, allowing you to care
for your mother and watch over the children when they come home from school. You
supplement the household income by raising chickens and growing some vegetables in a
small plot behind your dwelling. The eldest daughter also helps you weave rugs from wool
that you buy every month when you visit your extended family in a rural village a couple
hours away by bus.

Below are three various methodologies of MFIs operating in the neighborhood where you
live and work. Whose services would you prefer? What do you like most/least about each
methodology?

(a) A local state-owned bank has opened a microfinance window in its operations. It offers
small, individual loans for specific investment opportunities. The loan requires collateral. The
collateral is non-traditional, and the bank’s credit officer explains to you that it could be, for
example the wedding necklace inherited from your mother. You would have to state the
purpose of the loan on the application, which the bank verifies after disbursement. Loans are
approved and disbursements are made on an on-going basis. If you invest your loan as stated
and repay on time, you are eligible for larger loans for the same productive investment. The
bank also offers savings services.

(b) The local village bank offers small loans to its members. This requires that you deposit a
percentage of your loan amount with the bank before borrowing. Each subsequent payment
must also be accompanied by small savings contributions. The loan can be used for any
purpose. The bank disburses every two weeks. You are also required to attend weekly
meetings during which members repay their loans and receive financial planning advice. You
must join the village bank by paying a small membership fee.

(c) An NGO in your neighborhood offers solidarity group loans. As part of its general poverty
reduction scheme, the NGO targets the poorer clients by performing a wealth ranking of all
potential applicants. It subsequently only lends to those in the lowest quartile of the ranking,
and disbursements are made after weekly committee meetings for loan approval. Loans are
made to individuals in the group, but each borrower guarantees the others’ repayments. Loan
increases are stepped according to fixed increases, and such increases are considered only if
the entire group re-applies for a loan.

3. Why do you think that people value the liquidity of savings? What costs and/or problems
do you associate with illiquid savings? (10)

4. What kinds of factors might affect attitudes towards charging sustainable interest rates
in your local environment? How can an MFI overcome negative attitudes towards such
rates? Construct an argument to discuss with someone who holds such attitudes in your
own country or locality. (10)