Microfinance Horizon

Author(s): Irfan Hendrayadi, Emily Martin, Tithee Mukhopadhyay, & Jenna Allard

Abstract:

The boom of microfinance products over the last two decades has provided critical financial services to the poor with the goal of alleviating poverty by filling the gap left by large scale poverty reduction programs. These programs have proven that the poor are bankable and can repay loans at a significantly high rate, which has led to an increase of donor funds as well as an increase in commercial actors entering the field. As of 2009, there were over 90 billion microfinance borrowers, and the total loan portfolio was about $60 billion USD. Even with an increase in microfinance institutions (MFIs) lending to the poor, there remains a marked focus on lending in urban areas. Although some MFIs may branch out to rural areas, they tend to focus on providing services to clients that are viewed as less risky and fit within the confines of the microfinance as usual model.  As a result, loans for agricultural purposes are often a negligible portion of an MFI’s loan portfolio. Academic literature on agricultural microfinance is unanimous on the need for innovation in the design for credit products. As the literature suggests, the microfinance as usual [MAU] model does not currently meet the needs of rural, small farmers. Therefore, it is evident that a new model of finance is needed to bridge this gap.

This paper explores an innovative, new model of microfinance that is meant to help fill this void. The Agent Intermediated Lending model [AIL] is a digression from the general microfinance models that enforce joint liability and group lending contracts. It is predominantly an individual lending model that capitalizes the social networks of rural landscapes and seeks to make agricultural microfinance sustainable. The structure is designed to operate in the traditional agricultural marketing networks of traders, wholesalers, and other intermediaries, termed as middlemen. In this paper, we scrutinize a randomized control experiment that placed this product in the traditional potato-marketing network of West Bengal in India. We strive to justify the motivation, placement, design, and evaluate the impact of this innovation. The first part of this analysis consists of an academic literature review meant to place this model within the current microfinance context. The second section introduces the AIL model of lending, and describes the different features of this unique product. Additionally, this section sets out to compare the new model with the MAU model. The next section offers an econometric analysis of the impact of the AIL model. Specifically, we look at impacts on production, marketing, and recommendation patterns. We then move to a qualitative analysis based on an anthropological survey given to the different actors involve with this intervention. We end with recommendations for future research.

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