Asset Quality Improves for India’s MFIs

The following article reports on optimistic trends found on the loaner’s side of micro-finance, although there is not much information on the impact the borrowers have experienced.

This article reports on the grading done by Indian financial rating firm, CRISIL. The article “Asset quality of microfinance institutions improves: Crisil” written by Gayatri Nayak, was reported by The Economic Times, a subsection of the Indian newspaper India Times. The report comes with optimistic news of the microfinance institutions, whether comprised of small banks or non-banks, seeing improvements in their loan portfolios especially after an economic shock. Particularly when it came to stability in asset quality. As defined by the United States Federal Deposit Insurance Corporation, asset quality rating reflects the quantity of existing and potential credit risk associated with the loan and investment portfolios, other real estate owned, and other assets, as well as off-balance sheet transactions [1]. The report attributes this rise to three factors: the decrease in delinquencies, rising cumulative collection efficiencies, and an increase in investor support. However, do these attributes show any similar optimistic changes to the actual borrower?

The first of the attributes to the improvement in asset quality comes from more loans being paid back. Delinquencies have dropped from 7.6% (June 2017) to 5.6% (December 2017) of payments that are 30 days past due. Similar results for 60 days past due: 6.8% (June 2017) dropped to 5.3% (December 2017). Meaning that there are fewer people who Screen Shot 2018-05-01 at 22.56.26are not paying back the money they have borrowed. According to CRISIL’s senior director, Krishnan Sitaraman, lower delinquencies indicates that borrowers are paying more than one installment and that existing delinquents are paying back what they owe. Having a greater payback rate is an important thing to point out. A greater payback rate signifies that more borrowers are finding successful output from their investments. Hence, successful investments can lead to greater economic development in theory.

The second attribute highlighted has to do with the rise of cumulative collection efficiencies. In other words, the collection of debt has increased. CRISIL reported that there has been a 99% increase in the efficiency for disbursements made after April 2017. An increase such as this one is indicative of an improving market environment and better borrowing discipline. These two outcomes are a hugely positive outlook for India’s
micro-financial markets, who have suffered from demonetization in 2016 and early 2017. Demonetization is, according to Investopedia, the act of stripping a currency of its legal status of being an official medium of payment [2]. In November 2016, India’s government called for the demonetization of all 500 and 1000 rupees banknotes [3]. Given such short notice, announcing such radical plan caused money shortage leading there to be a serious disruption in economic output [4]. Therefore, seeing the market make a rebound such as this one, gives strength to the microfinance market as a viable stimulant of the economy. However, the microfinance market is still susceptible to further effect from the demonetization. CRISIL estimates that 5-7% of credit was lost due to the demonetization. So, it is a critical focus for micro-finance institutions to have increased funding in order to provide a cushion from sudden shocks.

Such funding results in the third attribute mentioned by CRISIL, Investors. There has been an increase in investor support toward the micro-finance sector. According to CRISIL’s report, investors have especially invested in both equity and debt capital markets. Since the events of the demonetization, CRISIL estimates micro-finance institutions to have raised around Rs 4,000 crore of equity and Rs 7,000 crore of debt from their investors. Refinance institutions and larger banks have also continued their funding for micro-finance institutions. These lendings are facilitated by giving priority for transfers to occur toward micro-finance institutions [5]. As discussed earlier, more funding for micro-finance institutions allows for market shocks to have less of an effect on the institutions being able to continue lending out loans regularly.

This report highlights how much micro-finance institutions impact can have in analyzing the health of the credit market. Based on CRISIL’s latest analysis, there seems to be a lot of growth currently happening in India; at least as of February, when this report was written. Having this report shines an optimistic light on micro-finance institutions’ role in supporting the economy. India still has an economy recovering from the demonetization, micro-finance institutions are seeing greater frequencies of paybacks from their borrowers. However, an important thing to point out is whether or not the borrowers are seeing a greater impact on their loans as well.


A microcredit market possesses two types of borrowers: risky borrowers and safe borrowers. Risky borrowers invest in risky projects with a particular probability of that project succeeding, thus making returns on their investment in order to pay back the loan. A safe borrower invests in a safe project in which they will always be able to pay back the loan.Screen Shot 2018-05-01 at 22.57.01

Now with the context of both types of borrowers, it becomes unclear as to how much of a positive impact micro-finance institution are having in helping the economy. Particularly low-income citizens rebound from the effects of the demonetization. Due to having an increase in the number of loans that are paid back, at least three main outcomes could come as a result. One, more safe borrowers leading to safer assurance that payment will happen back to the lender. Two, there is an increase in risky borrowers actually having their risky projects succeed. Or three, a mix of both types succeeding. Personally, I believe given a recent financial shock, borrowers will most likely be risk-averse, meaning that they plan to avoid as much financial risk as possible. Therefore, the most likely case is the first. In this case, there are more safe borrowers in the market leading to less delinquent accounts since safe borrowers always pay back their loan.







Main Article:


Private or Public Sector Banks? A discussion of efficacy and perception of Indian Banks


Between 1955 and 1969, the Indian government bought majority shares in the previously private banks. This trend has continued to the point where 83% of banking business in India is conducted by banks that are primarily owned or controlled by the government2, according to Banerjee et. al.(2004). The largest acquisition act was the Banking Companies Act of 1969, which stated that the government would acquire control to “serve better the needs of development in the economy in conformity with national policy and objectives”. While the debate on state control versus private free markets has continued over time, the both systems have often failed in execution due to fraud and inefficiencies.


This debate has especially flared uprecently, with the Indian government implementing an action plan to assess these public-sector banks (PSBs) on their abilities to address risks and examine non-performing loans under the Enhanced Access and Service Excellence(EASE) reform agenda1. These actions came about in response to scams committed by the Punjab National Bank, which prompted officials such as Chief Economic Advisor Arvind Subramanian to propose the privatization of banks3.

However, others like famed economist Muhammad Yunus has thrown his lot against the privatization of the PSBs, saying that they did not demonstrate a prospect of significant increase in performance3. Yunus’ credibility comes from his lauded heading of the Grameen Bank and its efforts in microfinance in Bangladesh, for which he received a Nobel prize4.


In a study conducted by Agrawal and Yadav (2011), it was shown that not only do privately conducted banks perform better but they also have better growth projections and sustainability. This was measured through net profit, return on assets, and Net Performing Assets ratio6.

Banerjee supports this analysis in his work that builds on a previous paper that dealt with microfinance in rural India2. In a previous paper, Banerjee discusses the lack of results from microfinance access in rural India. This time, however, Banerjee sees under-lending as a way in which banks are not responsive to government’s agenda2. This is the same for both private and public banks. This implies that government control of the banks has not led to the desired results stated in the Banking Companies Act of 1969. Rather, Banerjee continues on to say that PSBs maintain an air of almost business complacency in that they lack the aggressiveness in pursuing accounts and incentivizing deposits2.

This makes sense intuitively as a person’s attitude towards government may shift his or her preference towards or against a PSB. Distrust towards the government due to any combination of corruption or grievance. Ultimately, the problem is the lack of uptake. Underutilized microfinance institutions cannot bring about greater economic growth, whether owned by the state or not. Yet, it appears that that potential growth is actually limited by the government’s control.

In a 2004 paper, Barth, Caprio, & Levine raised another cautionary tale. In the paper they warned against government control over banking activities. They found that strict policies against private banks were the ideal way to ensure efficient banking systems and to protect against fraud7. Specifically, enforced transparency and incentivized corporate control by the private sector’s private agents were found to encourage good banking practices7.


Effect of PSBs on MicroCredit

PSBs should actually be more attractive to borrowers, as they can offer lower interest rates, controlled by the government. While private banks offer greater overall trends of growth, they also must adjust for risk of liquidity. As PSBs are more stable, the interest rates can remain low and technically should entertain more loans than private banks. However, studies show that while there is a dearth of uptake in general, people go against theory to lend from private banks rather than PSBs. Now, this may be due to the risks of suffering negative consequences of fraudulent activity by PSBs. However, Banerjee also lacked the aggressive nature of private banks.

This comes down to a Moral Hazard issue.

Ex Ante Moral Hazard is when a borrower misrepresents his or her own information in order to secure a lower interest rate or larger loan by presenting a lower risk loan to the bank. This can be largely affected by whether a bank is a PSB or private. People may perceive PSBs to have a greater ability to investigate this sort of information, leading to a greater uptake in private banks whose capabilities may be or may be perceived to be lower than a PSB.

Ex Post Moral Hazard is when a borrower chooses to repay his or her loans so that future transactions may be preserved. Failure to repay may actually more easily reconciled at private banks due to the idea that 1) private banks may not have or may not have the ability to acquire information on a borrower’s ability to repay and private banks might have more flexibility in its policies as the PSB must adhere to government protocol. In both situations, it seems that a private bank may be more attractive to a borrower despite higher interest rates.

In order for a PSB to be efficient, it will want to minimize risk. However, this is counterintuitive to the policies that mitigate that risk. Adverse selection is one approach in which a financial institution may choose higher interest rates to mitigate risky loans, but unintentionally weeding out those with safer loans who would not pay for that risk. A possible explanation, then, for a greater uptake of loans with private banks is that riskier borrowers are really the ones on the margin, leading them to participate in the microfinance of private banks.



So, are private banks a solution to the problems of fraud, growth, and microfinance? Ultimately, it would seem that it might be with the proper conditions. As stated before in the work by Barth, Caprio, & Levine, a set of strict conditions allow for some of the same benefits of a PCB. The works by Banerjee and Agrawal determine for us that in terms of aggregate economic growth, private banks provide more and have greater incentives to succeed. However, with the strict conditions, perhaps the threat of fraud and under-lending can be solved, in microfinance as well as aggregate growth.


Works Cited:

1Tiwari, Dheeraj. “Finance Ministry to Check Readiness of PSBs on Bad Loan Frauds.” The Economic Times, 10 Apr. 2018,

2Banerjee, Abhijit V., Shawn Cole, and Esther Duflo. 2004. “Banking Reform in India,” mimeo, Massachusetts Institute of Technology,

3“Nobel Laureate Yunus Not in Favour of Privatisation of PSBs in India.” The Economic Times, 8 Apr. 2018,

4“Muhammad Yunus – Biographical”. Nobel Media AB 2014. Web. 1 May 2018. <;


6Agrawal, P, and AK Yadav. “A Comparative Study of the Public and Private Sector Bank with Special Reference to Punjab National Bank and HDFC Bank.” Journal of Business and Financial Affairs, OMICS International, 30 Nov. 2015,

7Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. “Bank regulation and supervision: what works best?,” Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.

A Discussion on the Economy of South Africa: Past, Present, and Future

By: Brian Williams


Good economic news has recently come out of South Africa, as the country experienced 3.1% GDP growth in the fourth quarter of 2017, and is now projected by the World Bank to exceed an earlier projection and have GDP growth reach 1.4% in 2018. While this is certainly something to take pride in, South Africa has some lofty goals for their future economic growth, as the government’s ambition is to achieve a 5% growth rate in the coming years. This post will analyze the historical growth of South Africa to gain a better understanding of future growth prospects for the Rainbow Nation.

Government Policy Analysis

In order to sustain and even improve growth, Paul Noumba Um, South Africa’s World Bank Director, acknowledged that GDP growth in his country is being challenged by unemployment, inequality, and poverty.[1] The GINI Coefficient, a measure of the inequality of a country with values between 0 and 100%, is very high in South Africa relative to other countries at 63. This means that a small percentage of the population owns a large proportion of the wealth.[2]

GINI index
The GINI Index of South Africa and important countries

     The South African Department of Trade and Industry highlights that companies will have a large pool of both semiskilled and unskilled workers to potentially employ as a major draw for investment, which would reduce the high inequality prevalent in the country, as well as help grow the economy with more people working.[3] To reduce poverty and close the inequality gap, Julie Schaffner’s textbook on Development Economics describes government policies that take into account the financial constraints the poor are faced with, such as bringing markets into remote areas whose inhabitants are commonly poor due to their large proximity away from financial centers, along with policies that “explicitly create new assets owned or used by the poor,” as the most effective. These policies perform multiple tasks, as they promote a reduction in inequality along with promoting growth in the economy with equal success to policies targeting those with average income.[4]

 BRICS Analysis

To get a better picture of South Africa’s future, it’s past economic progress can be a useful guide. BRICS is an acronym used to group the countries of Brazil, Russia, India, China, and South Africa together. First established by Goldman Sachs economist Jim O’Neil in 2001 to identify strong, growing economies, BRICS has advanced into “a new and promising political-diplomatic entity, far beyond the original concept tailored for the financial markets,” with Summits between member countries held annually and group decisions made often.[5] In his paper Divergence, Big Time, Lant Pritchett studied the average growth rates of 17 currently high-income countries from three different time periods. Divergence in this case is defined as the state when the GDP per capita of wealthy countries increases quicker than the GDP per capita of other countries, creating a greater divide between the two groups.[6] The table below presents a similar study to Pritchett’s, conducted with data for the BRICS countries over three different time periods.

GDP Growth Rate.png
Growth Rates of BRICS countries over 3 different time periods

One observation from this analysis is how South Africa has fallen from having the highest GDP per capita to having the fourth highest of the BRICS countries. Couple that with their consistently low average growth rates relative to the other countries (1.80, -0.467, and 1.586), and it becomes a signal that South Africa is diverging away from countries like Brazil, China, and Russia in terms of economic growth per capita.

OECD Analysis

The economies of the BRICS countries are often thought of as less developed relative to the advanced economies of the world, which are typically considered to be the OECD countries. Pritchett defines the OECD countries as European countries, their offshoots, and Japan. In his work, Pritchett estimated “that from 1870 to 1990, the ratio of per capita incomes between the richest and the poorest countries increased by roughly a factor of five,” which is a signal that divergence had occurred between the “developed” OECD countries and the other “less developed” countries.[7] By comparing the adjusted income per capita of South Africa and the OECD member countries, as shown in graph below, it becomes apparent that the divergence Pritchett discussed has occurred here as well.

Income per capita divergence.png
Income per Capita Divergence between OECD countries and South Africa

Numerically, the World Bank estimates that in 1971, the adjusted income per capita in South Africa was 728.245, while for OECD member countries it was 2,547,569. Had convergence occurred between these two countries, it would be expected that this gap of approximately 350% would have been reduced by today as South Africa’s economy would have grown faster than the OECD member’s economies, but this is not what happened. In fact, the current adjusted income per capita of South Africa is estimated to be 4,258.973, while this statistic for OECD member countries is now approximately 30,785,193, over 700% greater than South Africa’s. This exceeds Pritchett’s estimation and shows a high degree of divergence between South Africa and the developed OECD countries.[8]

Future Growth Potential

Even with the positive news of growth for the South African economy, the government still believes that higher growth rates can be achieved. Taking a step back, it may be ideal for the South African Government to decide if this goal is actually feasible and sustainable. One calculation that can help determine a countries future growth is based off of the observations from a graph included in the 1997 paper On the Evolution of the World Income Distribution penned by Charles Jones. Jones compared a countries 1960 GDP per worker to that of the United States and found that for most countries, those that had a GDP per worker greater than 15% of the United State’s converged, or grew towards the same value, whereas those with a GDP per worker less than that figure saw divergence.[9] For our experiment, we will compare South Africa’s 2016 GDP per worker to that of the United States use that to determine if convergence or divergence will occur in the future. No assumptions were made about the countries in Jones paper, as he simply observed a result from the raw data. The table below describes this relationship between South Africa and the Untied States, the reference country.

Jones analysis.png
Analyzing South Africa’s potential for future growth

Dividing 13614.28556 by 114512.8955 yields the approximation that South Africa’s ratio is 11.889% that of the United States. This is below the 15% threshold Jones observed for divergence, so if his findings hold than South Africa should be expected to further diverge away from the United States. As a result, with this evaluation, South Africa will not achieve their target goal of 5% growth, as they will be expected to grow slower than the United States, a country that averages around 2% growth annually.


[1] Winning, Alexander. “World Bank Raises South Africa 2018 Growth Forecast.”

[2] GINI Index-South Africa. Raw data. The World Bank.

[3] “Why Invest in South Africa.” Trade, Exports & Investment.

[4] Schaffner, Julie. Development Economics: Theory, Empirical Research, and Policy Analysis.

[5] Rachid, Biatriz. “Information about BRICS.”

[6] Pritchett, Lant. “Divergence, Big Time.”

[7] Pritchett, Lant. “Divergence, Big Time.”

[8] Income per Capita-South Africa and OECD countries. Raw data. The World Bank.

[9] Jones, Chad. “On the Evolution of the World Income Distribution.”

Source Articles:

India’s Obsession with Oil

By Travis D’Souza


India’s economy is fueled by crude oil. Since oil is so important to India and its economic prosperity, obtaining units at the right price is crucial in order to spur financial growth. In a recent interview on April 11, 2018, Indian Oil Minister Dharmendra Pradhan stated that India wants to see prices at around USD $50 per barrel in order to better manage its finances (Times of India, 2018). Saudi Arabia is the largest crude exporter in the world and is also competing to be India’s top supplier. In order to compensate for their own crowded domestic agenda, Saudi Arabia is looking to sell their barrels at USD $80 each. India imports close to 80 percent of its crude requirements and has been diversifying its sources of oil supply in the Middle East while also seeking more favorable deals from exporters. This blog post will analyze India’s fascination with oil and how that directly relates to economic growth within its borders. Additionally, an alternative to oil consumption will be discussed.

Economic Growth Measures

Although economic growth makes development possible, rapid rates of growth alone do not cause financial well-being across an entire population (Schaffer, 84) . If a country has a positive economic growth rate, the incomes of its inhabitants rise on average, but it does not specify the poor households. In addition to the economic growth rate, economists use indicators to determine how the widespread increase of income benefits poorer families. Two of the indicators that will be discussed are poverty and inequality.

Poverty occurs when people experience well-being below a predetermined threshold. A common benchmark for evaluating poverty is the poverty line. A poverty line indicates the minimally accepted level of well-being for a household. Those who are below the line are classified as poor, whereas those above the line are not poor. The international poverty line was set to USD $1.90 a day in 2011 (World Bank). India’s poverty headcount ratio was 21.2% in 2011, which meant that 21.2% of Indian households lived in poverty.

Inequality exists when one household lives at a level of well-being lower than that of another household. Per capita household income is the most common statistic used to measure inequality. India’s nominal per capita income in 2016 was USD $1,670, ranked at 112 out of 164 countries by the World Bank. India has one of the fastest-growing economies in the world, but the continued rise of income inequality within its borders is alarming. Last year, India’s top 1 percent held close to 58 percent of total wealth. This year, India’s top 1 percent owns an astounding 73 percent of the country’s total wealth, which is at all all-time high (Times of India, 2017).

India’s Oil Issue

India’s economic development has drawn comparisons to that of China – a nation that has experienced substantial growth over the past few decades. A key difference between the two countries is oil. Thanks to the wealth of onshore and offshore reserves in China, it is currently the fourth largest producer of crude oil behind the United States, Saudi Arabia, and Russia (Bloomberg). On the other hand, the lack of Indian domestic crude reserves has made it the world’s largest energy importer for decades. India’s domestic oil production as a percentage of domestic oil production has dropped 14 percent since 2011 according to Ministry of Petroleum.

According to David Fickling of Bloomberg Gadfly, India is using the wrong fuel and should deeply consider switching to electricity.

“There are sound macroeconomic reasons for India to switch to electricity. The country’s domestic reserves of lithium are if anything less significant than its oil endowment. But an electric car uses that metal only when it’s manufactured, whereas a conventional one drinks oil year-in, year-out” (Bloomberg Gadfly).

The amount of oil consumption in India has also led to its capital of New Dehli being listed as the world’s most polluted city according to a 2014 World Health Organization study. By the same WHO study, half of the 40 most polluted world cities are located in India. Projections have shown that India will be the third-largest car market by 2019. The International Energy Agency projected that oil demand will reach 7.1 million barrels a day by 2030, with Indian domestic production only producing 0.4 million barrels during that same span. If India does not shift its focus to a less crude-dependent path, this sustained import dependence will prove to be detrimental to its economy. The graph below depicts India’s production and consumption of petroleum and other fossil fuels (EIA).

India Petroleum Graph

Women, Economic Growth, and India’s Energy Sector

Despite its economic advances, India’s gender balance in the labor force, entrepreneurship, and growth remains among the lowest in the world. History has shown that economies grow when more women work (OECD). Additionally, when women have access to a greater share of the household income – either through their own earnings or cash transfers – spending changes in ways that benefit the children (World Bank). Madhya Pradesh – an Indian territory – was home to a large-scale gender mainstreaming program that fundamentally improved the state’s energy sector.

Madhya Pradesh is India’s second largest territory that boasts a population of 75 million people. The territory has been historically notorious for growing at a much slower pace than the rest of India’s economy. From 1999 to 2008, Madhya Pradesh’s GDP grew only 3.5 percent annually (LEDS). Looking to provide economic alternatives for these communities, the Asian Development Bank created the Madhya Pradesh Energy Efficiency Improvement Investment Program in 2011, the first part of which was categorized as Effective Gender Mainstreaming. The funds provided by this program delivered tangible benefits to women by improving their access to energy resources, services, and energy based livelihoods through women’s self help groups and micro-entrepreneurs (LEDS).


India’s obsession for oil is reasonably justifiable – the valuable resource leads to increased economic growth, and India simply does not have the means to produce it in large quantities domestically. Positive economic growth does not however relate to equality among households within the population. That is why more attention and priority should be used towards electricity and more efficient forms of energy.

The efforts in Madhya Pradesh to use green energy not only helps reduce pollutants harmful to the population, but also decreases the inequality gap between men and women by giving women more responsibility and earning power.


Bloomberg. “How Saudi Arabia Can Hurt India’s Economic Growth – Times of India.” The Times of India, Business, 11 Apr. 2018,        

PTI. “India’s Rising Income Inequality: Richest 1% Own 58% of Total Wealth – Times of India.” The Times of India, Business, 16 Jan. 2017,

Schaffner, Julie. Development Economics: Theory, Empirical Research, and Policy Analysis. Wiley, 2014.

Fickling, David. “India Chases the Wrong Fuel.”, Bloomberg, 8 July 2016,

Inequality in India

Analyzing the inequality of wealth in India, and measures to combat it


India’s growth has been sustained at 6.8 percent annually for the last two decades. Despite these strides, this percentage is masked by the fact only one portion of India’s population is truly experiencing this growth. Former President Pranab Mukherjee addressed the prevalence of inequality and the push for inclusivity within India’s economy during a speech he gave in Mumbai on April 16.

Statistical Evidence

Mukherjee referenced data from the National Sample Survey Organization which stated the top 10% owns 61.51 percent of the nation’s assets, leaving the bottom 50% to divide a mere 4.77 percent of the remaining assets. In addition, according to the World Inequality Report of 2018, the top 10% holds 54.2 percent of the share of India’s income, while the bottom 50% share only 15.3 percent. From these two sources, it is evident there is a large gap in the distribution of assets and wealth in India, with a hefty portion apportioned to the top 10%.

      bar wealth line graph(Figure 1, The Hindu)

Furthermore, Mukherjee expressed his continued discontent with the nation’s education system. With nearly 40,000 colleges and universities across the country, India continues to receive only recognition for the students who study abroad at international higher education establishments such as Harvard, Cambridge, and Trinity. Mukherjee suggests redeveloping the current education system, shifting a larger focus towards vocational training and skill development. This foundation would be supported by a research element that would continuously improve the curriculum, as well as keep India up to date with the rest of the world.

Despite this seemingly unfavorable news, Mukherjee remained optimistic because of the vast amount of labor India has to offer. Approximately 63.5 million individuals between the ages of 20 and 35 have entered the workforce in the last five years, and by 2020 it is projected that more than 50 percent of the population will be under the age of 25. However, if the aforementioned programs of education and research are not executed properly and India is is unable to generate jobs for this growing population, they are at risk of what Mukherjee deems a “demographic disaster”. There would be a surplus of unspecialized workers, perhaps even unemployed, which would obstruct India’s attempt to decrease inequality.


Mukherjee only references statistics, but another measure of inequality is the Lorenz curve. This measure of inequality helps visualize and compare inequality, typically of national income. The curve itself lies on a graph (see Figure 2) with the percent of cumulative share of population on the x-axis, and percent of cumulative share of income on the y-axis. The 45-degree line indicates the perfect equality reference line, where everyone has the same income. The space between the Lorenz curve and 45-degree line is the inequality gap. Aptly enough, the further the Lorenz curve is from the 45-degree line, the larger the space between the curve, and the larger the inequality gap.

Screen Shot 2018-05-01 at 9.11.45 PM

(Figure 2, Schaffner)

From the Lorenz Curve, the Gini coefficient measures inequality among distributions, and in our case, levels of income. It is calculated by dividing the inequality gap by the total area under the 45-degree line. A Gini coefficient of 1, or 100%, expresses the maximum inequality, while a Gini coefficient of 0 expresses perfect inequality. In Figure 3, we see the Gini coefficient fluctuate and drop from 1983 to 2000, but since 2000, it has steadily increased.

Screen Shot 2018-05-01 at 10.01.31 PM

(Figure 3, Sarath KP et al)

During his speech, Mukherjee also references the trickle-down theory, which is likened to the principle of transfers. Wealth may trickle down from rich to poor through redistribution policies such as taxing the former. The poor will borrow less to invest, which encourages them them to maximize their profits. This improves the efficiency of an economy by allowing greater opportunity for all, equal opportunity one might say. Although these temporary redistribution policies may help the economy reach a long-run steady faster, they must be replaced by permanent policies under high rates of capital accumulation as a trickle-down policy is not sufficient to reach an efficient distribution of resources.

Bridging the Gap

Mukherjee emphasizes that adjustments should be made to create long-term effects on the economy, specifically to education, research, and agriculture. India possess a large labor force, but if individuals do not have the proper education to enter the professional workforce, they are unqualified to apply themselves to jobs that carry a greater weight towards India’s economy. In regards to research, by investing more towards research and technology, India will not only continue to develop domestically and create a strong base for the current labor force, but also stay competitive internationally. Agriculture is quite different because it does not contribute to India’s economy directly as education and research do – rather it guides and cushions from inequality. Furthermore, the success of the farming depends on the success of education and research. Ideally, combining modern storage to ensure the longevity of products, creating more efficient ways of transport, and cutting intermediaries to connect farming with consumer directly will save time and money. However, making agriculture more attractive and financially rewarding is a preliminary place to start while education and research have time to advance.



Aghion, Philippe. (1996 September). A Theory of Trickle-Down Growth and Development. Retrieved April 24, 2018, from

Sarath K. P. , et al. (2016 November). A study on Income Inequality in India: Past, Present and Future. Retrieved April 27, 2018 from

Schaffner, J. (2014). Development economics: Theory, empirical research, and policy analysis. Hoboken, NJ: Wiley.

Service, E. N. (2018, April 16). Jobless growth is no growth, says Pranab Mukherjee. Retrieved April 24, 2018, from

S, R. (2014, December 08). India’s staggering wealth gap in five charts. Retrieved April 30, 2018, from


More Nigerians to Have Easy Access to Credit Facilities – Osinbajo


The Nigerian government has recently made a large commitment to increase access to financial services and credit markets for its citizens. Vice President Yemi Osinbajo noted the significance of financial inclusion in Nigeria, stating in the article, “it is absolutely important for us and our economy” (Jannah, 2017). The World Bank defines financial inclusion as the ability for individuals and businesses to have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way (Financial Inclusion, 2018). Since 2008, financial inclusion in Nigeria has grown from 23% to 48% (Jannah, 2017). Osinbajo would like to see this trend continue; as such, he has set a target of 80% financial inclusion in Nigeria within the next three years. In order to project the impact of an 80% financial inclusion rate, it is first important to understand the underlying economics of credit markets.

Neoclassical Model

The foundations of credit markets revolve around the neoclassical model and its assumptions. Under this model, all parties in credit markets have complete information about the market. That is, both lenders and borrowers know all information about one another, including factors such as the borrower’s ability to repay the loan and the type of project the loan will be used for (Ray, 1998). Perfect competition is another key assumption of the model, according to Development Economics. Lenders cannot increase interest rates above their cost of capital. If they were to, other lenders would undercut the rates charged and drive the high interest lender out of the market. Although the neoclassical model is the basis for credit markets, its assumption are unrealistic. In real credit markets, asymmetric information disrupts the assumptions of the neoclassical model.

Asymmetric Information

Formal lenders in credit markets often lack crucial information about a borrower. For example, lenders are unaware of borrower idiosyncrasies such as farming/entrepreneurial skill, mental acumen, and thriftiness, among other characteristics (Ray, 1998). Additionally, lenders often cannot monitor precisely how loans are used or the returns generated from loans. These real-life credit market issues can be divided into two main buckets: adverse selection and moral hazard. Given these issues, governments and lenders in credit markets must institute certain practices and procedures in order for credit markets to operate efficiently.

Adverse Selection

Adverse selection is a common form of information asymmetry. Under adverse selection borrowers bear different risks. Lenders are unable to discern whether a borrower is safe or risky (Ray, 1998). This poses a problem for lenders because they prefer to charge risky borrowers higher interest rates in order to adequately compensate for the increased default risk. However, safe borrowers prefer not to pay high interest rates because they expect to have secure returns; the low default risks of their loans do not justify high interest rates. As such, safe borrowers exit the credit market at high interest rates, which leaves behind only risky borrowers. A population comprised solely of risky borrowers is unattractive to lenders, because risky borrowers have higher relative default risks. Lender’s lack of information of a borrower’s risk type makes it more difficult for them to find an optimal interest rate. Nigeria has a system in place to help combat adverse selection.

In the early 1990s Nigeria implemented a credit risk management system. The government ratified the CBN Act No. 24 of 1991, which established a central database of consolidated credit information on all borrowers (Credit Risk). This legislation required all banks to report returns on loans provided to all customers, as well as their outstanding balances, every month. As a result, all banks were able to check the credit information on potential borrowers and use that information to determine whether the candidate was worthy of a loan. Consequently, banks in Nigeria are able to approximate the risk level of potential borrowers, diminishing the risks of adverse selection.

Since the implementation of the credit risk management system, banks have been able to better screen applicants, which has resulted in persistently lower interest rates in Nigeria, as seen in figure 1.

Nigeria Lending Rate

Figure 1: Nigeria Lending Rate. Source:

Nigeria’s credit risk management system has helped reduced adverse selection, as well as moral hazard, which is discussed below.

Moral Hazard

Moral hazard is another issue associated with asymmetric information. Moral hazard comes in two main forms: ex-ante moral hazard and ex-post moral hazard. Ex-ante moral hazard refers to a behavioral change in the borrower before the loan proceeds are spent. Ex-ante moral hazard refers to a behavioral change in the borrower after the loan proceeds are spent.

In credit markets, ex-ante moral hazards relates to how the borrow chooses to spend the proceeds of a loan (Ray, 1998). Since there are information asymmetries, the lender is unable to observe how the borrower spends the loan. For example, while a lender might think a loan will be used to invest in a business, the borrower might take that loan and buy frivolous personal items instead. Since these items would not produce a return, the borrower would default on his loan, at the expense of the lender.

Ex-post moral hazard relates to how the borrower reports the results of his investment (Ray, 1998). Lenders are often unable to observe the results of an investment, which gives borrowers the opportunity to falsely report losses. For example, a borrower might use a loan to invest in a business that generates high returns as a result, but report to the lender that the business failed. In a vacuum, this would enable the borrower to keep the business’ returns without paying back the interest on the loan.

Nigeria has two main ways to combat moral hazard. The first of which is the credit risk management system discussed above. The system records individual borrower’s defaults. In the event of a default, every bank in the country knows that that particular borrower is risky and will choose not to lend to them in the future. This causes borrowers to fear being blocked from the credit market in the event of a default, so they will do everything in their power to prevent default, lowering the risk of moral hazard. Collateral is another method used to prevent moral hazard. Development financial institutions in Nigeria require collateral on loans above a certain amount (Nigeria Loans, 2017). DFI security agents have the authority to sell, foreclose upon, or take possession of collateral assets. The prospect of losing an asset of value incentivizes borrowers to prevent default, which also diminishes the risk of moral hazard.

Nigeria has the policies and systems in place for efficient credit markets, which could help to make the goal of 80% financial inclusion in the country attainable. In order to assess the effects of increased financial inclusion, I will refer to empirical evidence.

Empirical Evidence

In a 2010 study of consumer credit, conducted in South Africa, researchers Karlan and Zinman had lenders make small loans to low-income workers to help smooth their consumption. Poor individuals who are strapped for cash typically demand consumer credit (Ray, 1998). More often than not, these individuals are farmers. These individuals require consumer credit in the event of sudden downturns in their production, abrupt declines in the prices of their goods, or increased consumption needs for events such as illnesses, deaths, or weddings (Ray, 1998). According to the study, access to consumer credit increased wellbeing in several ways. For those assigned to get loans, income increased, food consumption improved, access to future loans increased, and subjective measures like optimism and status in the community improved (Karlan & Zinman, 2010). Given the fact that over a third of Nigeria’s population works in agriculture, as seen in figure 2, many Nigerians could benefit from increased financial inclusion through consumer loans.

Nigeria agriculture

Figure 2: Percent of Nigerian Population Working in Agriculture. Source:


Nigeria has the systems and procedures in place to promote credit market efficiency. Issues that arise from asymmetric information have largely been negated by the government’s credit risk management system and the collateral requirements of development financial institutions. While it is not clear whether the country will be able to achieve Vice President Osinbajo’s target of 80% financial inclusion in 3 years, empirical evidence suggests that any increase in financial inclusion will benefit agricultural workers through consumer credit.

Source Article

Jannah, C. (2017, November 02). More Nigerians to have easy access to credit facilities – Osinbajo. Retrieved from

Other Sources

Credit Risk Management System. (n.d.). Retrieved from

Financial Inclusion. (2018). Retrieved from

Karlan, D., & Zinman, J. (2010). Expanding Microenterprise Credit Access: Using Randomized … Retrieved from,5069.1

Nigeria Loans & Secured Financing – Getting The Deal Through – GTDT. (2017, August). Retrieved from

Ray, D. (1998). Development economics. Princeton, NJ: Princeton University Press.

Poverty Elimination in Tibet


Xinhua News Agency, the largest and most influential media agency in China, also the official press agency own by China’s ruling party, published a consolidated report about the government’s “poverty lifting projects in Tibet” and its consecutive plan for next year. It is reported that in 2017, Chinese government invested a total of 16.7 billion yuan (2.6 billion U.S. dollars) in lifting 1,705 villages in Tibet out of poverty. The news also says: a total of 150 thousand people was pulled out of poverty and there were only 330 thousand impoverished people left in Tibet. While these figures are seemingly gratifying for its readers, the insider of development economics, however, would instead remain skeptical about the actual effects of poverty lifting projects in Tibet. (Xinhua News Net)



People who live in poverty, experience well-being below some baseline level. Absolute poverty is when people have no access to minimal food, clothing, shelter, medication, and other essential living needs over an extended period and relative poverty describes people who suffer poverty using the typical level in their society. Regular measurements of poverty include the headcount ratio and total income gap. Headcount ratio is measured by dividing the fraction of people who live below the poverty line by the total number of population. It intuitionally shows the severity of the poverty problem. The population of Tibet is 3,310,000 (by National Bureau of Statistics of China in 2016), and the remaining impoverished population is 330,000 (by Xinhua News), which means the headcount ratio of poverty in Tibet equals 9.9% approximately. Total income gap, on the other hand, shows the total amount of money that would be needed to help poor people escape poverty. It equals to the sum of each poor person’s income shortage measured by the poverty line. By Xinhua News, 16.7 billion yuan was used for helping 150,000 poor people, which means that in average, 111,333 yuan can help one poor person escape poverty, which also means if the impoverished population is 330,000, the total income gap would be 36.74 billion yuan. We must know that the number cannot be used for one lump-sum donation because without giving poor people a sustainable method of earning money, they would quickly drop back into poverty. Note that the above estimations are based on the assumption that poor people are identical in Tibet, which means their incomes are all the same. Since there is no published poverty line, without this assumption, the total income gap is not obtainable. Other measurements like average proportional income gap, poverty gap index, and squared proportional income gap index are more sophisticated in calculating. They measure individual’s income gap as a percentage of his/her income and then amplified into an aggregate level. Each one of the three measurements serves a different purpose. Poverty gap index, for example, represents the cost for each person in the society in eliminating poverty. Unfortunately, neither international organizations nor Chinese government published any relevant result, so we may not obtain the actual numbers here.


Economic Growth

Development in a region is a combination of the decline in poverty and the growth in its economy. Although it is true that growth of the economy brings people accessibility to food, clean water, and other essential living needs, and poverty would decline to some extent, we cannot ignore the other payoff. In almost every case, a significant portion of well-being brought by economic growth goes to the rich people. The part that is shared by the poor might be insignificant, and the income inequality in the society may skyrocket. Without balancing policies on poverty and economy, a government might achieve an opposite of its wish.

Gross Domestic Product of Tibet last year was 115,141 million yuan, facing a 12.2% annual increase rate. Tibet’s GDP growth is remarkable: in 2007, Tibet only produced 34,143 million yuan in production, and in ten years, its GDP tripled. The ten-year growth rate (237.5%) is even higher than China’s ten-year GDP growth rate (174.5%). (National Bureau of Statistics of China)

The unemployment rate has declined from 3.8% to 2.5% and remained stable between 2.5% and 2.6% rate since 2009. Annual disposable income per capita increased 11.3% to 13,639.24 yuan. The number of medical and health institutions increased from 1,326 in 2008 to 6,835 last year. Length of public transportation increased from 262 kilometers in 2007 to 1035 kilometers the previous year.

From the statistics, we know that government’s projects in Tibet successfully boosted economic growth: Most people have jobs and incomes; Their living expenses reach out, and they can afford things other than necessities; they have more access to preventing and curing disease; Society is improving infrastructure constructions and social welfare system. In general, the vulnerability of the society has declined, and persistent poverty becomes less and less possible.



Inequality is a product of ineffective poverty elimination with adequate economic growth. Consider the extreme cases of inequality, when inequality is maximized, one person in the society owns all the wealth and all the other people have no wealth at all, and when inequality is eliminated, whole wealth in the community is distributed evenly to all the individuals. Inequality is harmful because wealth can be power, such that rich people will have overwhelming force. This power can be used to protect their wealth defensively or to snatch poor people’s wealth offensively. In the latter case, people under poverty might be wiped off instead of lifted out. Moreover, once inequality is there, removing it will be tough.

China has a severe inequality problem. According to The World Bank, GINI index for China in 2012 was 0.424, 15th in the global ranking. For the last two decades, China has been growing faster than most people would expect, but along with growth, inequality increased as well. If the Chinese government apply the same development strategy used in other provinces to Tibet, there needs to be an Ex Ante solution for income inequality.


China’s GINI index from 2003 to 2016 (National Bureau of Statistics of China)


Unlike every other province in China, Tibet experienced more protracted poverty and much slower development. One cause is the geography: all major cities and villages in Tibet are at least 4,000 meters above sea level. This condition would set restrictions on primary industry. Also, the unstable society suffers a lot from protests and uprisings. Tibetan separatists not just refusing development programs but also keeping the poor people from getting aids. The pursuit of a better Tibet consists of systematic cooperation of poverty elimination, inequality prevention, economy boost, and social stability. The wish for eliminating poverty by 2020 (Xinhua News) needs both determination and preparation.



National Bureau of Statistics of China. Annually by Province. 2 3 2018. 30 4 2018. <;.

Xinhua News Net. Tibet lifts 1,705 villages out of poverty in 2017. Ed. Yurou. 8 4 2018. 28 4 2018. <;.