Re: Devfinance: Microfiance for income smoothing or invetsemnt instrument? Economic models operate with the "ceteris paribus" or "everything else the same" assumption meaning that we can only change one assumption at a time. If group lending is indeed efficient because it lowers information and enforcement costs then, ceteris paribus, it is more efficient than individual lending. The modelling exercise however is as good as the assumptions underlying it. The questions you are raising, which is a good one, requires new assumptions not about information and enfocement costs but about other input-output relationships namely the utility function, the production function and the marginal returns on investment. Morduch's new book on Economics of Micofinance makes a good theoretical case  that, contrary to the fundamental assumption of microfinance, smaller borrower do not have higher returns to capital because of "non-economic" factors related to access and capabilities. If we add the consideration that smaller borrower have a higher propensity to consume, then this becomes another crack in the microfinance mirror.

Ahmad Jazayeri   
  ----- Original Message ----- 
  From: Manh Hao Quach 
  To: Development Finance 
  Sent: Thursday, April 27, 2006 9:33 AM
  Subject: Devfinance: Microfiance for income smoothing or invetsemnt instrument?


  Dear friends,



  Perhaps this is an old topic but I've just thought of the question that whether micro credit is as an income-smoothing or an investment instrument. As you may be aware of, economists seem to assume that micro borrowers have "projects" which may earn income for their repayment. The distinction of risk versus safe type of borrowers also depends on the type of projects. This approach is then widely used to build models which explain e.g. why group lending can be used to overcome market imperfection .etc. While I am not concerned with how useful those models are, I am concerned with the fact that most successful micro lending models are with regular savings and weekly installment repayment. This implies that micro borrowers must have a source of income, or at the least, it implies that micro credit as an investment instrument is hard to be the case of success (because if it is, we may expect the repayment at a later point in time). Hence, if micro credit is mainly for income smoothing, how economic models (e.g. group lending) would be changed? 



  Just a random thought - please correct me if I misunderstand somewhere.

  Cheers,

  Quach
