Does Subsidising the Cost of Capital Really Help the Poorest? An Analysis of Saving Opportunities in Group Lending

Kumar Aniket

Research output: Working paperDiscussion paper

Abstract

This paper shows that subsidising the cost of capital restricts the
ability of the poorest to participate in the group lending mechanisms
that offer opportunities to save. We document the group lending
mechanism used by a typical microfinance lender in Haryana, India.
We found that the groups have significant income heterogeneity within
them. Individuals can participate in the group either as a borrower
or a saver. The lender requires that the borrower partly self-finance’s
their project with their own cash wealth. Consequently, a borrower
requires a minimum amount of cash wealth to borrow. The poorest
participate in the group by co-financing the borrower’s project with
their meagre savings. In return, they obtain higher than market returns
on their savings. Subsidising the cost of capital reduces the cash
wealth required to participate in the group as a borrower. Conversely,
it increases the cash wealth required to participate as a saver, thus
curtailing the opportunity for the poorest to enrich themselves.
Original languageEnglish
PublisherEdinburgh School of Economics Discussion Paper Series
Number of pages47
Publication statusPublished - 25 Nov 2005

Publication series

NameESE Discussion Papers
No.140

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