How MFIs in Bangladesh help Disadvantaged Women Start Their Businesses

By: Veronika Skryl


                An article from “The Bangladesh Today”, entitled “Microcredit Programmes turn many women self-employed”, discusses how Microfinance Institutions in Bangladesh promote skill-based education in order to make it possible for Bangladeshi women to run successful businesses. 3,500 women were given loans as well a three-month long requisite training in such fundamental fields as sewing, boutique, embroidery, food processing, modern packaging, and shopping bag preparation. Also, 374 voluntary women organizations received grants that will be aimed at improving the quality of life of the participating females. The District Women Affairs Office is establishing a project titled “Women-Skill Based Training for Livelihood” that will focus on underprivileged Bangladeshi women, especially divorcee, widows and highly financially dependent females.

According to the article, the effect of the program on the disadvantaged Bangladeshi women is significant: experience in the specific income-generating fields together with financial support resulted in the establishment of numerous successful tailoring, and boutique houses operated by the trainees. Moreover, Shefali Boutique and Mohona Mohila Kolyan Samity’s Mohona Boutiques alone transformed at least 175 women into financially independent individuals and self-reliant members of the society.


                The article explains the effects of the policy of the Microfinance Institutions (MFIs) in Bangladesh offering intensive training and financial support to disadvantaged women. Microfinance programs in poor countries share certain characteristics: targeting (especially women), and ability to solve moral hazard and adverse selection. Informal microlending that involves joint liability can be characterized by lower interest rates, as well as an increased probability of repayment in comparison to the individual bank loans. The article mentions the specific group of people that participate in the project: widows, divorced and self-reliant women. Therefore, the program is highly targeted to underprivileged females that require financial support and cannot provide for themselves. In general, various Microcredit Institutions tend to target women because they are assumed to be trustworthy and such an intervention can change the balance of power in the household.  The microloan programs mentioned above include a combination of small-scale financial support and requisite training, that help solve various problems and build a successful business. While microloans can be considered common for MFIs, individual training is an innovative feature. Therefore, this work will be based on the statement that specialized training is a new key element of the microfinance programs in Bangladesh that results in better outcomes and increased effectiveness. Since the programs include intensive training, loans and grants, it would be reasonable to discuss the effects of each component accordingly.

A three-month training offered by the MFIs in Bangladesh is the main element that can make those programs more successful than any other microfinance project. Intensive training can be highly effective due to its ability to increase the overall probability of the business being successful, and higher revenue when the business succeeds.

The first statement suggests that those women who have the requisite training and experience in a specific field, are more likely to run a profitable business due to their experience in that industry, ways of solving the possible problems and understanding of the needs of their target audience. Therefore, there is a higher probability of their newly established companies being well-organized and professionally supervised. Consequently, the output and revenue of such businesses are likely to be more substantial compared to the same indices for the companies run by people who did not have an opportunity to participate in the training. If a person gains experience in a specific sphere, he is expected to produce high-quality products that can be sold at a higher price. Thus, the overall revenue of the company is likely to be higher than if the employer did not have the necessary experience. Output yR is expected to be higher, and the social welfare will also increase under the condition that the costs remain constant or increase at a slower rate than the output.

Another component of the microcredit programs that can potentially solve adverse selection and moral hazard is microloans that are offered to the participating females. Most MFIs in Bangladesh offer group loans what implies joint liability (Chakravarty). Being mutually responsible for repaying the loan makes all the members of the group more likely to honestly pay back the necessary amount. It is important to consider the fact, that the programs are implemented in small Bangladesh communities where people know each other and can tell who is a trustworthy citizen and who is not. Therefore, the  MFIs have a better access to informal information about the potential borrowers, what makes it easier to correctly predict how they will behave and what projects they will invest in. Besides, the trained women would be more likely to invest in “safe” projects due to the financial support offered by the MFIs. A loss of respect within the community, as well as the inability to borrow in the future make the borrowers less susceptible to default. In addition, the boutique houses operated by the trained participants are controlled by the District Women Affairs Office. This type of constant supervision decreases the likelihood of dishonesty since the profitability of the businesses is monitored. Thus, the problems of Ex-Ante and Ex-Post Moral Hazard are resolved.

It is widely known that MFIs have more access to informal information on the people within a community which helps to make better predictions of who is a good or a bad potential borrower. Besides, joint liability which implies shared responsibility for repayment generates positive assortative matching and induces people to choose responsible and safe borrowers to pair with. Therefore, microcredit schemes help solve Adverse Selection by helping people sort themselves and making it harder for risky borrowers to enter the market.

The last element to consider are grants that do not only directly increase the welfare of the participating women, but also increase the probability of repaying the loans. Additionally, numerous low-income households get into the “debt traps” which are a cycle of re-borrowing due to the inability to repay. A grant can help avoid such a problem, since it can cover a certain amount of payment and thus, the necessity of getting another loan to repay the current one no longer exists. However, grants cannot cover all the payments, thus there is a need for more long-lasting methods of solving the problem.

Summary and Recommendations 

Even though offering intensive training to a target group is an innovative feature of the programs presented in the article, there is a potential for further advancements with the goal of making the programs even more effective. The training offered to the Bangladeshi women only involves a narrow range of activities, like sewing, embroidery, food processing, etc. However, being a business owner requires a specific skill set, that involves at least some understanding of accounting and bookkeeping. Therefore, it may be beneficial for the women to additionally participate in the rule-of-thumb training that gives a basic understanding on how to manage accounts of a company. This type of financial literacy training is elementary and simple in comparison to a standard accounting program that involves double-entry accounting, and management of capital (Drexler). Rule-of-thumb practices involve physical rules of keeping money in separate drawers in contrast to managing complicated financial accounts. A study of the effectiveness of those two types of training by Drexler demonstrates that the rule-of-thumb method has more significant effects compared to standard accounting, especially for people with the lowest human capital with limited knowledge of accounting or business administration.

Considering all that was mentioned above, it would be reasonable to conclude that the implementation of the microfinance programs in Bangladesh yields substantial results. Bangladeshi women that participated in the project have become self-reliant individuals and have launched successful boutique houses. Nevertheless, there is a possibility to make the programs even more effective. The main suggestion is to apply the rule-of-thumb training that can give the necessary knowledge of the essential accounting techniques required for business management.

Works Cited

  1. Chakravarty, Sugato, and Abu Zafar M. Shahriar. “Bank-Borrower Relationships and Transition from Joint Liability to Individual Liability Loans in Microcredit.” 2012,
  2. Drexler, Alejandro, et al. “Keeping it Simple: Financial Literacy and Rules of Thumb.” American Economic Journal: Applied Economics. 2014,
  3. “Microcredit Programmes Turn Many Women Self-Employed.” The Bangladesh Today,



When There Is Not Enough Credit to Go Around: The Challenges of Accessing Microcredit in Myanmar

As financial regulations lax and with the entrance of more nongovernmental organizations into Myanmar, microfinance and the availability of microloans have made it much easier for citizens of Myanmar to gain access to credit that they would not otherwise have access to. However, the demand for credit is far greater than the current supply. Currently, over 2.8 million clients have access to microloans in Myanmar. As that number continues to grow, credit constraints, the lack of credit availability, and the lack of financial literacy has made it difficult for people who need credit the most to access it. (The World Bank)

An article from the Myanmar Times published on March 1, 2017, Agricultural Sector and SMEs to Receive Private Bank Loans, talks about recent policy changes implemented to help farmers and small business owners. With the intervention of the Myanmar Private Sector Development Committee (PSDC), the committee has passed into law that private banks in Myanmar must grant a minimum percentage of all their commercial loans to people in the agricultural or SMEs (Micro, small, and medium-sized enterprises) sectors (Htwe.)

The current Agricultural Minister of Myanmar, Myint Hlaing, has stated, “The agricultural sector is the backbone of Myanmar’s economy as the entire agricultural sector contributes 30% of its current GDP. In addition, 61% of the country’s labor force is working in the agricultural sector” (Centre for Agriculture and Bioscience International.) Since agriculture is such a large part of the Myanmar economy, it is understood that additional funding and capital is required for the industry and economy to develop.

As of now, microloans are only made by state-owned banks. Local private banks rarely lend to local borrowers because of the lack of profitability and high risks of lending. Many of the private citizens who require microloans do not have the collateral nor credit history to justify receiving a loan, and laws set by the government cap the amount of interest that private banks can charge on these private loans (13%.)

(The World Bank)

The state-run banks currently charge an 8.5% interest rate and an 8% interest rate to SMEs and farmers, respectively. Should a borrower go to a private bank, they would be charged a 13% interest rate. Currently, it is unfeasible for private banks to
match the interest rate of the state-run bank, as they pay 8% interest rates on banking deposits (Htwe.) The main issue here, is deciding upon interest rate that would satisfy the state-run bank, the privately-owned bank, and the borrower.

With the passing of the 2016 Monetary Law, banks are no longer required to collect collateral when deciding who to give loans out to, but that just makes the vetting process more difficult. Despite the law, many private banks still require collateral as they cannot thoroughly vet borrowers, and many banking relationships in Myanmar are built on trust and reputation (Htwe.)
U Thein Myint, a deputy general manager at one of Myanmar’s privately-owned banks argues that, “If people fail to pay back their loans, the banks will encounter difficulties in paying deposits from its customers. This is detrimental to the financial system and the national economy. Therefore, for people seeking bank loans, they need to provide strong guarantee.” Until there is a proven high chance that commercial banks will be paid back, loans provided for the agricultural and SMEs sectors will remain low (Htwe.)

A retired vice president of the Myanmar Central Bank, U Than Lwin, hopes that the government can work out an arrangement with private banks so that money can be lent to people who need it the most. A proposed idea would be for the government to implement a system so that they can partially guarantee loan repayment, which would make the lending process for banks much easier. Another idea would be to mitigate risk by lending to a larger group of people, by spreading the amount of risk that people would take on when taking out a loan.

Some of the issues described in the article written by Chan Mya Htwe regarding microcredit are also issues seen in countries struggling to meet the demand for microcredit by their citizens. This is amongst one of the many challenges encountered for governments or NGOs implementing a microcredit and microfinance program in a developing country (Schaffner.) In a country where access to finance is difficult and people are spread out across rural areas, there is adverse selection on both sides for both the borrower and lender. Lending caps and inconsistent lending practices make it hard for borrowers to access loans. This usually results in a loan from multiple financial institutions or a loan shark (Schaffner.) The inconsistent income that depends on the planting and growing season along with the lack of good jobs makes it difficult in certain cases, for people to pay back their loans. With the new law instituted by the government preventing banks from collecting collateral on loans, the end result is an inefficient outcome where the borrower does not get the money they need for their everyday life and the lender just makes loans elsewhere where the financial institution knows they will be paid back.

Private financial institutions need a new way to thoroughly vet prospective borrowers if they cannot collect collateral beforehand (Htwe.) There is a possibility of lending to large groups and spreading out risk through group liability, but in every borrowing and lending situation, I feel that the lender assumes a lot more risk than the borrower.

The first microloan programs were first instituted in Myanmar in the mid-1990s (Soe.) As new laws are passed and as regulations become more lax, there have been an increase in NGOs in the country, making small loans to farmers and small business owners. The exchange rate, interest rate caps, along with high denominations in its currency discourage more NGOs coming in (Soe.) As the program continues to grow, I hope that microloans and microfinance can reach people in areas that still are not developed, or destroyed by the ongoing Civil War. I think that the Myanmar government needs to do more for its citizens, rather than rely on outside humanitarian organizations to provide a basic lifestyle for people who need it the most. This is a difficult problem that I feel would not be solved anytime soon, as lack of financial literacy in its citizens, lack of access to large amounts of credit, and lack of willing lending institutions keeps people stuck in the cycle of poverty.


Schaffner, Julie. Development Economics. N.p.: Wiley, 2014. Print.

Ray, Debraj. Development Economics. N.p.: Princeton UP, 1998. Print.

C. (n.d.). CABI and China boost agricultural development in Myanmar. Retrieved May 09, 2017, from

Tun, T., Kennedy, A., & Nischan, U. (2015). • Promoting Agricultural Growth in Myanmar: A Review of Policies and an Assessment of Knowledge Gaps (No. 230983). Michigan State University, Department of Agricultural, Food, and Resource Economics.

Htwe, C. M. (2017, March 01). Agricultural sector and SMEs to receive private bank loans. Retrieved May 09, 2017, from

Soe, H. K. (2016, September 06). Can microfinance still make a difference? Retrieved May 09, 2017, from

Finance runs afoul

An inquiry into why financial companies might not be following the rules.

A recent article by published the Times of India titled “Finance companies not following rules: Self-help groups,” reported on the ongoing protest of women in Nashik. These women from a number of self-help groups (SHGs) were out protesting to demand an inquiry into multiple micro finance companies in the district. The protesters claimed that these financial companies were not following the rules agreed upon between the financial companies and the SGHs. These rules mostly dealt with contact between financial companies and SGH members. Two stated violations were contacting SGH members outside of agreed upon hours and harassing SGH members to repay debts of other SGH members. Other allegations included the charging of exorbitant fees, forced recovery (also known as seizing property), and that these companies have been forging groups to increase their business. The protesters are demanding that the collector, the government, and the Reserve Bank of India review the performance of these financial companies. An employee of a micro finance company did respond for the article and denied the allegations saying the protesters were all made aware of the terms and refuse to pay it back. They further made the statement that while some collection agents do play foul they are easily identified and reprimanded.

The protestors make troubling claims that suggest behavior different than what the theory of micro credit predicts. The claim that companies are setting up their own groups to expand their business goes against the main strength of micro credit theory; which is that by lending only to groups, the groups that arise are positively assorted matches. Micro credit uses these positive assorted matches to reduce the risk of the lender by shifting it onto the borrower. In micro credit if one member of the group fails to repay all the members lose access to credit. This risk is what causes the positive assertive matching because risky people who need the extra income of their peers to cover their loan if their project fails, and safe borrowers want to match with safe borrowers to make sure they don’t have risk losing access since they wouldn’t be able to cover another members’ share of the loan if they failed.

If the claims made by the protestors are true then the companies are ignoring the benefits this positive assertive matching provides, and assuming that they are rational there must be something the model is missing. One solution could be that there are strong laws in favor of property seizure in the region. If a contract is binding and legally strong enough to allow for easy seizure of property maybe the risk of failure is not a deterrent. By expanding their business and including the amount they must be repaid they don’t have to fear if their loan fails as long as the signer has the required wealth. Based on the protestors testimony we can assume that the seizure of property is not outside of the finance companies reach, since they are protesting forced recovery. The extra cost of seizure or its ease could also help explain the allegations that these firms are charging exorbitant prices. If it is difficult to seize property the extra price could cover the cost. The flip side of the coin is that if seizure is easy maybe it is worth increasing the price as failure of a loan can be recouped through property seizure.

Another possibility is that these financial companies are not truly following the microfinance model and are instead using a model closer to the neoclassical model. This model differs from the micro credit model because it doesn’t utilize the benefits of positive assertive matching and instead has individuals responsible for themselves. This decreases the chance that the lender will get repaid because the borrower doesn’t have a group to fall back on to repay his share. Because of the decrease in chance that the lender gets repaid they charge higher prices than they would under a grouped positively assorted micro finance system. This could help explain why the prices were viewed as exorbitant. The question that must then be answered is why would a company using this model bother with forming groups instead of individual contracts. One reason would be that by creating groups of shared liabilities they are able to solve the problem of ex ante moral hazard. Ex ante moral hazard is that the borrower might choose a risky project that has a higher chance of failure and thus not being able to repay the lender. By forming groups, they can rely on a sort of social pressure to not put the group at risk or to force the group to repay the failure. With the ability to force recovery the company now doesn’t have to worry about ex post moral hazard, the risk that the borrower doesn’t repay, because even if they don’t repay the company can seize the borrower’s assets.

A third possibility is that the financial company employee is telling the truth. This is the easiest possibility to explain in economic theory. If the employee is telling the truth then the current model of micro financial theory is working as intended, and the problem lies with the protestors trying to shirk from their obligations. If there are existing cultural standards that would make the recovery of loans impossible the borrower would be much better off. They would have the support of the government and not have to repay the money that they borrowed.

The current situation shows a desire for credit in the area, otherwise people would not be protesting the financial institutions and instead just ignore them. We can also assume that access to credit is under supplied if there are claims about exorbitant fees because any company charging exorbitant fees would be undercut and removed from the market in a perfect equilibrium. In conclusion, we can see that the entire story is not being told in this article. If it were we would know why the claims made by the protesters seem to contradict the micro credit theory, why the company might be using the neo-liberal credit model, or the incentives provided to the protesters for shirking from their repayment.

The row of P2P landmines behind the “Trap”

The current underlying risks behind Chinese P2P programs.
By Ping Lu


As the Chinese economy progresses rapidly throughout the decades, its people has also became increasingly wealthy as more cash begins to flow into the public market. Many small businesses saw this as an opportunity to expand themselves, however lacked the funds to take such action. And as a result of this demand for funds, P2P(peer-to-peer) lending became vastly popular among small companies that needed urgent money, as well as people who are willing to take a risk to lend the money for a greater return.  Yet with the growing popularity, problems between borrowers and lender also begin to arise. From XinHua news, it was listed that in the year 2013, only 76 P2P platforms had credit issues, and yet only 2 years later in 2015, this number has risen to 896.

The article itself presents the problem that P2P is still mostly unregulated in China, and that platforms are abusing the P2P system for their own benefits, whereas in one case the platform owner scammed 900,000 investors into a poor investment. If the problem is not dealt with soon enough, more companies and private investors that invest their money into P2P would find that their opportunity cost in P2P is not worth the risk that they are taking, hence pulling their money out and resulting in the collapse of P2P platform due to the shortage of funds.

Building the Model

This cause and effect could be clearly explained by the lender and borrower model despite the different platforms P2P take places on. We could simplify it to a model that is composed of two lenders and two borrowers, whereas the platform itself exists as both the lender and borrower. The platform on one hand collects the money from multiple lenders that expects return, and on the other hand it lends the money to investors that they trust.

The problem with this platform is the ex-post moral hazards and the ex-ante moral hazards that the original lender faces, where ex-post moral hazard is the case where the P2P company receives the profits from the original lenders and reject to inform them about the outcome, and ex-ante moral hazard is the case where the platform fails to return profit from their investments. In both of these cases, despite the different outcomes, the original lender cannot observe the risks they face as they invest the money into the P2P platform. It is the platform that determines the actual investments.

Risks and Rewards

If we return to the news post, we could learn that the lack of regulation increases both of these two types of risks, as investment companies may make poor investment decisions that yields negative returns due to the lack of the background check for its borrowers, or simply because the platform tries to take all the profit and pretends to have failed the project, which in both of these cases the original borrower loses their investment.

However, despite many investors are aware of the risk, the opportunity cost of the P2P investment is too large to be ignored. In the year 2015 alone, P2P yields an average return of 13.29% (China Economic Watch, June 27), far exceeding the bank interest rates as well as other wealth management products. Both lenders and platforms saw this opportunity as China’s outstanding loans skyrocketed from $4.3b to $71b in only two years. But despite this rapid growth, the regulations still remain to be old and outdated, giving risky borrowers and platforms opportunities to take advantage of the lender since the punishment is minor in comparison to the profits.

Yet the lack of regulation isn’t completely negative in terms economy development. It is similar to a double edged sword, and in this case the borrower benefits the most from this system. The lack of regulation and background check enabled certain poor people to qualify for P2P loans, whereas in other financial institutions they would have been rejected. And in China, this situation is actually more common than we think (Banking On the Poor in China, March 10) as current microfinance services does not come close to meeting its demands. Government and bank regulations make it difficult for small businesses to get access to the loans they need, and the smaller the scale of the business, the harder it becomes due to the risks it poses. Therefore, these small companies could only seek investments from P2P platforms in order to continue their businesses. But because of the high risks, the platform charges borrowers extremely high interest rates as compensation in order to reduce ex-ante moral hazards, Hence P2P has high risks but also higher rewards.


Therefore, in order to both reduce moral hazards P2P faces and satisfy the need for microfinance services, new regulations have been imposed which puts different limits of lending on different people (Bloomberg News, Aug 24). This reduces ex-ante moral hazard because even in the worst case scenario, investment yields no return, the company would still be able to function rather than collapsing and losing all of its investors’ money, and that the lending amount would still help small businesses while having a decent payoff for the platform. And in terms of reducing ex-post moral hazards, monitoring and laws must be enforced to ensure the clarity of platforms such that their cost of taking the risk of defaulting is much higher than not taking such action.


Martin Chorzempa (June 27, 2016), P2P Series Part 1: Peering into China’s Growing Peer-to-Peer Lending Market, Retrieved May 2, 2017, from

Brendan Rigby (March 10,2011), Banking On the Poor China, Retrieved May 2, 2017, from

Bloomberg News (August 24, 2016), China Imposes Caps On P2P Loans to Curb Shadow-Banking Risks, Retrieved May 2, 2017, from

Housing microcredit for informal workers in Indonesia

An analysis of the Indonesian government’s housing microcredit program for informal workers.

By Rachel Carroll


As Indonesia strives to catch up with the economic growth of its East Asian Tiger neighbors, the government has worked to increase financial inclusion for its citizens. Over 70 percent of adults in Indonesia do not have bank accounts, according to the World Bank Financial Index (World Bank, 2014). This lack of access to credit hinders Indonesians’ ability to make large purchases that offer improvements to quality of life— most notably, housing. Even with government subsidy programs, over 20 percent of Indonesians are unable to purchase their own homes (The Jakarta Post, March 2017). The inability to buy a home can negatively impact citizens by restricting their sense of community and impeding their efforts to create stable homes for their children (Leeder, 2017).

According to a recent article from the Jakarta Post, “BTN to introduce micro housing credit for informal workers”, the state-owned lender BTN (Bank Tabungan Negara), aims to solve these issues of financial inclusion and low home-ownership by offering housing microcredit to workers in Indonesia’s informal sector (The Jakarta Post, Feb 2017). The informal sector includes vocations such as farming, fishing, and trading. Workers in this sector often have incomes that are low and unstable. This leaves families vulnerable, and in many cases, it only takes one family emergency or bad harvest to tip these workers into poverty. If the Indonesian government wants to succeed in becoming an economic powerhouse like neighboring Singapore, it must address the financial vulnerability of these informal workers.

In order to qualify for a housing loan from BTN, informal workers must open an account with BTN for at least three months so that the bank can monitor and analyze their cash flows (Yudistira, 2017). Additionally, borrowers must be part of a community or cooperative— such as the Association of Mie Bakso Traders (APMISO)—and must have a letter of recommendation to be eligible to participate in the housing microcredit program. Unlike other housing assistance programs that the Indonesian government funds, there is no minimum income requirement for borrowers (Bank BTN, 2017).

The loans offered to informal workers through the program are modest, ranging between Rp 50 million and Rp 75 million—$3,800 to $5,700 USD, respectively. These loans can be used to purchase, renovate, or build homes that are constructed by a government-owned housing company called PT Perumnas. State-owned lender BTN predicts this program will benefit over 6.5 million low-income households who do not have access to mortgages under traditional Indonesian government programs (The Jakarta Post, Feb 2017). To assess the validity of these claims, it is necessary to consider how BTN’s program fits within the traditional microcredit model and whether or not it violates the model’s’ assumptions.

Evaluating the Impact of BTN’s Program

Housing microcredit has a somewhat different framework than the more common enterprise microcredit, specifically in regards to moral hazard and collateralization. While enterprise ex-post moral hazard refers to borrowers lying by stating that their enterprise failed, housing ex-post moral hazard refers to borrowers lying by stating that they do not have the income to pay their mortgage anymore. In enterprise ex-ante moral hazard, borrowers take on projects that are too risky, while in housing ex-ante moral hazard, borrowers get loans on houses they cannot afford.

The frameworks of housing and enterprise microcredit also differ in terms of collateralization. While the collateral for enterprise loans is either the borrower’s wealth or social standing, the collateral for housing loans is the house itself. Because BTN’s housing microcredit program does not use social standing as collateral, it consequently does not employ joint liability, wherein workers borrow in pairs and must both repay their loans in order for either one to borrow again.


In addition to departing from the traditional microcredit model in terms of its framework, BTN’s program also differs in terms of its target market. Traditional microcredit usually targets small entrepreneurs who are often women, but BTN’s program is solely for informal workers who are almost never entrepreneurs and are often men, as 85% of heads of household in Indonesia are male (World Bank, 2012). The difference in BTN’s target market could affect the program’s take-up— the likelihood that men working in the informal sector will participate in this program.

The Future of Housing Microcredit in Indonesia

The success of BTN’s microcredit program will depend on how the program managers define success. Success could mean that the program breaks even and all borrowers repay their loan. Success could mean that BTN reaches its goal of helping 6.5 million Indonesians get homes. Success could mean that more informal workers open bank accounts and therefore financial inclusion improves in Indonesia. Success could mean that informal workers are “better off” for having participated in the housing microcredit program.

If BTN defines success as breaking even, borrowers in the program must repay their loans. This could be difficult to ensure because informal workers have low-income jobs that are highly volatile and vulnerable to shocks, both idiosyncratic and macro. If BTN defines success as increasing the number of Indonesian informal workers who have bank accounts and homes, there must be high take-up among workers in the informal sector.

Lastly, if BTN defines success as making program participants “better off,” owning homes and opening bank accounts must benefit informal workers by making them richer, happier, or both.  This means that owning a home built by PT Perumnas must either 1) be cheaper than renting or 2) people derive a sense of happiness from owning a home as opposed to renting one. While there is a wealth of literature on the benefits of buying versus renting in developed countries, there have been no extensive studies conducted on the subject in Indonesia. Therefore, it is difficult to determine if this assumption holds. This also rests on another assumption that opening a bank account either 1) increases participants income or 2) makes them happier by smoothing their consumption and therefore makes them less vulnerable to negative shocks such as illness, natural disasters, and family emergencies. Based on research done by Dupas and Robinson, there is strong evidence that opening a bank account does indeed improve peoples’ economic outcomes (Dupas and Robinson, 2013).

BTN’s ambitious housing microcredit program has potential to improve the lives of millions of Indonesians. The program’s success hinges on several factors, including loan repayment, program participation rates, the expense of buying versus renting homes in Indonesia, and the benefit of opening bank accounts. Although it may not succeed perfectly in every way, it is likely that BTN’s housing microcredit program will have at least modest benefits for the traditionally marginalized informal workers of Indonesian society.


Benefits of Owning Your Own Home. (n.d.). Retrieved April 24, 2017, from Leeder Real Estate Team website:

BTN to introduce micro housing credit for informal workers. (2017, February 10). The Jakarta Post. Retrieved from

Dupas, P., & Robinson, J. (2013). Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya. American Economic Journal, 163-192.

Female headed households. (2012). Retrieved from The World Bank database.

Financial Inclusion Data/ Global Findex. (2014). Retrieved from The World Bank database.

Kampung [Photograph]. (2014). Retrieved from


Only 40 percent of Indonesians can afford to buy a house: Sri Mulyani. (2017, March 28). The Jakarta Post. Retrieved from

Sasar Masyarakat MBR Dan Pekerja Informal, Bank BTN Rilis KPR BTN Mikro [Basic Social Market and Informal Workers, Bank BTN Release KPR BTN Mikro]. (2017, February 24). Retrieved from Bank BTN website:

Yudistira, G. (2017, February 14). Ini syarat dapat KPR Mikro BTN [This requirement can be KPR Mikro BTN]. Retrieved from Kontan website:

To be ,or not to be? The current challenge of Chinese Micro-credit companies

A general introduction to China current micro-credit market, and an in-depth analysis of micro-credit market competition.
By: Ming Zhou

News Review:

The Chinese economy has experienced a significant economic growth over the last few decades, and base on the empirical study from Burgess and Panda, there is a strong correlation between economic growth and financial development. The concepts of Micro-Finance was introduced by Mohammad Yunus in mid-1970s, Microfinance is a program which offers credits, savings and other financial services to poor household or individual who cannot afford services from the commercial bank. (Julie Schaffner)

According to Xinhua news, the article “Outstanding loans of Chinese micro-credit firms hit 929 bln yuan in September” states China’s microfinance market has grown exponentially and the total amount of outstanding loans reached up to 137 billion U.S. dollar on Sep, 2016, with 8,741 companies which are related to Microfinance market. Much small-medium businesses or individual households have been benefiting from access to a small loan. The Chinese government encourages the ongoing investment activity to these little businesses, which can be explained by the concept of the Solow model. As more and more entrepreneurs choose to open business, this is more likely to generate more ideas; a good idea could often transform to new technology. Technology is substantial to economy growth; one good illustration of this theory is by comparing South Korea and North Korea. South Korea is more technological advanced than North Korea and hence it has a much stronger economy.

Competition in the micro-finance market, a general landscape:

Although many small business benefits from the blooming micro-credit market, the micro-finance market is still facing some challenges.  Lenders face strong adverse selection due to an unsound information system in China. Micro-finance companies also facing strong competition from commercial banks. Unlike the situation explained by Julie, Commercial Banks have a large market sector in China micro-credit market; many commercial banks have micro-credit sector that offer loan to small and medium enterprises. Aside from commercial banks, Micro-credit companies also face competition from rural finance and online finance such as P2P lending. Rural finance offer loan for agricultural purpose. On other hand, with easier access to the Internet, online finance has raised some world-known corporations such as Alibaba which offers similar finance service to small enterprises, who trade goods through the Alibaba’s platform. Microcredit companies in China targets finance for small enterprise rather than individuals. (Jeffrey Riecke) And this is consistent with the news article, as Jiangsu Province has the most amount of micro-credit companies, the region is well known for business activity base on its geography advance.

One interesting insight I got from a journal on the China Story, author Luke Deer illustrates the boom of China micro-finance offers many access to small enterprise. However, the cost of borrowing is much higher than similar program in developed economy. According to the survey, the rate of borrowing offered by the Rural Cooperative Banks was 13.8% for a annual loan, which is three times higher than China’s official lending rate at that period. The article points out although the cost of borrowing was high, households still prefer to borrow from the rural program, rather than informal borrowing from family and friends, is the program offer service which comes with low transaction cost and shorter period of time, and the process is transparent which reduce asymmetric information. (Luke Deer) This finding is consistent with Julie’s theory, when transfer costs are low and markets are well integrated, entrepreneurs can produce output in a cheaper price as input is cheaper.

The Challenge:

The boom of China credit market not only benefits the small enterprises, but it also provides opportunity for lenders as well. Most of the owners of micro-credit companies do not have proper knowledge on operating properly compared to developed countries. For instance, the owner may only consider lending money out as a “capital game,” which is a method to increase their personal wealth by offering a high-interest loan. The only focus on return does not benefit the business in the long run, as lack of standardized management and ambition to expand the business will eventually terminate many micro-credit companies in the future.

Unlike the commercial banks, micro-credit companies have limited amount of fund for loans. Without proper risk management and sufficient information access, micro-credit lenders face high adverse selection. Likewise, since commercial bank has also started to enter the micro-credit market, micro-credit companies’ faces increased risks as lack of competition, regarding lending rate and ability to lend. Moreover, as Jeffrey mentioned in his article, these companies have low access to credit reporting information from the central bank of China. I think although the government does encourage the activity of micro-finance, local government does not provide sufficient help to these lenders. Likewise, the government does not give a specific guideline or regulation on the micro-finance market. Many lenders can enter the market easily, facing direct competition from the commercial bank, one thing worth mentioning is four out of five commercial banks in China are owned by State. China economy is complicated as it is half capitalism and half socialism. Although the government tries not to intervene in the market, the existence of State-owned enterprise creates a disadvantage to other, as state-owned enterprises have more connection and can easily gain information or help from the government.

In the long run, I think the micro-credit market will well divide into smaller segments as market specialization increase companies’ ability to survive. A significant amount of small micro-credit companies will be eliminated; the remaining will transform to rural finance as they do not have the ability to compete with the commercial bank in the urban area. On the other hand, smaller companies might merge or collaborate with each other to compete with the commercial bank or be acquired by the commercial bank as a retailer in the rural area.

Works Cited

Outstanding loans of Chinese micro-credit firms hit 929 bln yuan in September. (2016, October 25). Retrieved April 24, 2017, from

Schaffner, J. (n.d.). Development Economics: THEORY, EMPIRICAL RESEARCH, AND POLICY ANALYSIS (Chapter. 21). Tufts University.

Deer, L. (2014, September 17). A Springtime for Microfinance in China? Retrieved April 24, 2017, from

Riecke, J. (2015, March 12). China’s Microfinance Landscape: Nonprofits, Microcredit Companies, Rural Financers, and Alibaba. Retrieved April 24, 2017, from

Muhammad Yunus: Empowering Women in Developing Countries

By Adrian Requena
Dear World

“Portrait of Muhammad Yunus”

In 2006, Muhammad Yunus was awarded the Nobel Peace Prize for innovating the credit market. He established the first microcredit institution, Grameen Bank, for the purpose of empowering the poor and giving them an opportunity to become independent entrepreneurs. Yunus had another equally as important goal when he envisioned the revolutionary microcredit service; gender equality.

At the HUB Chamber of Commerce in Santo Domingo, Dominican Republic, Yunus addressed multiple microcredit institution and delivered the conference “Eradicating world poverty, one loan at a time”. Here, he urged the present party to note and continue integrating his principles that make microcredit such a successful venture.

Yunus seems to have noticed that lending money to women is more beneficial to the household. He argues that women are more cautious and therefor spend differently than men. We will discuss this later on in this blog. First, it is crucial to understand the inequality women face in most, if not all, developing countries.


 The Reality of Women in Developing Countries


In Julie Shaffner’s “Development Economics: Theory, Empirical Research, and Policy Analysis”, she notes that the lives of women and girls in developing countries are much harder than that of men and boys. Within households, women and girls frequently consume less, work longer hours, and have generally fewer rights compared to men and boys. Shaffner continues to describe what it is like being a girl in South Asia and China, where they receive lower quality of food, are less likely to receive health care when they are sick, and have a higher mortality rate. Women work longer hours than men taking care of all the household chores and jobs needed to keep the family afloat.

This being said, they have more restrictions on their freedom and fewer rights to own property. In many developing areas women have little to no decision-making power when it comes to the finances of the household. Yunus recalls a conversation he had with a woman in India about to receive a loan. She told him, “I have not touched money in my life… how am I going to use this money if I do not know how to handle it?” There is clearly something wrong with this picture, good thing Yunus recognized the problem and decided to do something about it.

Yunus continues to address exactly what his approach towards gender equality was. Under normal circumstances, bank loans should aim at women participation levels of about 50%, likewise for men. Grameen Bank aimed at making 90% of the loans go to poor women. This goal and change of focus by a bank really made an impact and truly empowered women who previously did not have many opportunities. Looking at empirical data around the developing world, this makes a lot of sense. Women are more likely to be self-employed than men. Shaffner reports that in urban Vietnam, “more than 40% of men and more than 60% of women are self employed”. It wasn’t until later that empirical research began to show what the real outcomes of lending to women were.


Impact of Women Decision-Makers


Katherine Esty, Ph.D in social psychology and founder of Ibis Consulting Group, spoke with Yunus in 1994 and was enlightened by the notion that lending to women almost always leads to better spending in ways that help their families over time. Yunus told Esty that women are less likely to use the borrowed money to buy unnecessary goods and luxuries like men, instead, they do what is best for the family and spend money on food and health as well as goods like cows, chickens, or seeds that could be sold and profited off of in the future.

This hypothesis can also by backed up by evidence presented by Shaffner from empirical research in Brazil. Thomas (1990) found that non-labor income in the hands of women had a bigger positive impact on family health and child survival rate than said income in the hands of men. Shaffner continues to point out a study by Duflo (2003) in South Africa. They found that pension income in the hands of women had a positive impact on girls nourishment in the household, while the same could not be said for pension income in the hands of men.

Much like Yunus before, Shaffner comes to the conclusion that “channeling development program benefits to women rather than men can increase program impact on household nutrition and other investments in the human capital of children”.


Prior to Yunus’ Grameen Bank, the participation of women in financial decisions in the household were close to none, Esty points out that 98% of borrowers at commercial banks in Bangladesh were men. Apart from being unjust and wrong, this is extremely inefficient and unproductive. Looking at this from an economic stand point, having 50% of the population that work the hardest and know what is best for the household not able to access capital was completely inefficient.

In order to alleviate poverty in the developing world, Yunus realized, women must be given equal rights when it comes to borrowing and making the tough decisions in the household. Hopefully Yunus’ believes and standards remain at the core of all microcredit institutions around the world.




Pascual, Kelvin. “Yunus: prestarle a mujeres es más beneficioso para familias.” Hoy digital. N.p., 17 Mar. 2017. Web. <;.

Esty, Katherine. “5 Reasons Why Muhammad Yunus Focuses on Lending to Women.” Web log post. Impatient Optimist . Bill & Melinda Gates Foundation, 10 Jan. 2014. Web. <;.