Rethinking Banking Armendariz – Morduch (Chap. 1) Week 1 Lecture 2

Structure of this class Credit: An Overview Demand side Supply side Credit Constraints Through the Lens Of Neoclassical Theory Justifying Intervention Interventions via Development Banks Conclusion: The Microfinance Way of Looking at Interventions

Credit: An Overview

Demand side

Supply side

Neoclassical theory

Two reasons why this may not happen

Classical example: Irfan Aleem (1990): 78% in Pakistan

Justifying Intervention Two reasons: 1) Efficiency and 2) Distribution

Justifying Interventions In Microfinance Against a background where interventions in credit markets could not be justified neither on efficiency nor on re-distributive grounds Microfinance: GLJR  lower “agency costs”  affordable interest rates  subsidies to disseminate the GLJR Infant industry argument Technical assistance for lowering “transaction costs” Increased competition via “smart subsidies”  Next class: A-M (Chapter 2)