An old joke says that a banker will only lend you money if you dont need it.

An old joke says that a banker will only lend you money if you donʼt need it. So when Guadalupe Perez found it hard to pay the rent for her party decoration store in Queens, New York, as the Great Recession hurt her business, she normally would have been forced to close her doors. Instead she was able to turn for help to Grameen America, obtaining a loan to tide her over. “It opened up a way for me to keep my business, ” she said. “It was a loan that I could pay little by little; I felt it was a good choice for me.” And she returned to Grameen, borrowing several more times to expand her store and invest in more inventory.

Grameen America is a subsidiary of Grameen Bank in Bangladesh, which pioneered the business of microcredit, providing small loans to poor individuals. It was created in the mid-1970s by Muhammad Yunus, a Bangladeshi economist with a PhD from Vanderbilt University. Regular banks require a borrower to have an established credit history and/or assets that are put up as collateral for the loan (and will be seized if the loan isnʼt repaid on time) — requirements that a poor person can rarely meet.

Instead, Grameen Bank relies on collective responsibility to ensure that its loans are repaid: each borrower is part of a five-member group that approves each otherʼs loan and provides oversight. The group doesnʼt have any legal obligation to repay the loan, but in practice the group usually does take financial responsibility if a borrower gets into difficulties. If everyone in the group repays on time, each member is able to borrow a larger amount the next time.......

QUESTIONS

1. What market inefficiency is being exploited by Grameen Bank? What is the source of this inefficiency? 

2. What tasks of a financial system does microlending perform? 

3. What do you predict is the effect of Grameen Bank’s lending on a community?