skip to content

Keynes Fund

 

Summary of Project Results


It is widely recognised that, especially but not exclusively in developing countries, market failures of one sort or another are the source of a significant drag on economic growth.

Further, it is often argued that these informational and enforcement problems are most significant in the operation of credit markets, especially for poor borrowers. The policy response pursued by most developing countries, over the last several decades, has involved direct and massive government intervention in the provision of credit, especially in rural credit markets, and in the small and medium enterprises sector. The (almost-universal) failure of such programs has prompted the development of a number of alternative mechanisms that take a less ‘top-down’ approach. Most notably, microfinance programs around the world have been touted as representing the best hope for loosening the credit (and saving) constraints faced by small borrowers who lack collateral and credit histories. Indeed, the most prominent of these microfinance institutions (MFIs), Grameen Bank, and its founder, were awarded the 2006 Nobel Peace prize.

We propose to take a closer at both these aspects. One part of the project looks at how small enterprises in a developing country, Kenya, respond to credit constraints. Lacking access to ‘formal’ credit from banks, small enterprises are often forced to resort to informal credit, which operates mainly on trust and reputation, and where defaults are punished by social sanctions rather than by recourse to the legal system. We suggest that these informal sources might work better for some firms than others – while some firms’ investments are constrained by their cash flow, others firms may be tapping into their ‘ethnic network’ to relax their financing constraints.

In the second part of this project, we look more closely at ‘microfinance plus’ programs, which combine the provision of credit and saving services with other services such as health or education. The conceptual basis for combining this ubiquitously-practiced bundling is unclear. Remarkably, there appears to have been no previous formal analysis of whether, and under what circumstances, these services are better provided together, versus being provided separately. We intend to construct a theoretical framework for this analysis, and to apply it to an analysis of data that we intend to collect, to also ask a related question: does program bundling improve or hurt MFIs’ provision of their ‘core’ credit programs?

This research directly addresses the goals of the Keynes Fund: what are the barriers to the efficient operation of markets in particular contexts? How have policy interventions affected these markets failures? To what extent can informal or semiformal institutions compensate for the absence of well-functioning formal institutions? A clearer understanding of these questions is crucial in the formulation of economic policy to address these problems.

 

 

Dr. Sanjay Jain

 

Dr Sanjay Jain is Senior Fellow in the Department of Economics at Oxford. His research interests are in Development Economics, Political Economy, and Applied Microeconomic Theory.

 

Share this Project