Lecture 10 - Challenge 4: Building the industry. A flourishing inclusive finance sector requires supporting conditions and cooperation among players. Direct providers-banks, finance companies, insurance companies-prefer to enter markets that have a certain amount of industry “infrastructure.” | FOUR CRITICAL CHALLENGES IN THE BOP MARKET Summary of Last Lecture Challenge 2: Reducing the Cost of Small, Dispersed Transactions Challenge 3: Managing Informality Risk Managing Informality Risk Nothing will suspend motivation faster than interrupted access. I recently learned of an African bank that began a small pilot microloan program. Managing Informality Risk As loans were repaid, they were not renewed, on the grounds that the loan capital set aside for the poor should be spread to as many people as possible— a typical charity-based intuition. Managing Informality Risk Clients got wind that the first loan would be the only loan. Repayments plummeted, and the bank dropped the pilot. The second insight is about cost-effective risk management. Managing Informality Risk Because loans are small, one default does not matter. This concept allows loans to be made with very simple assessment and documentation procedures, reducing underwriting costs. Managing Informality Risk What does . | FOUR CRITICAL CHALLENGES IN THE BOP MARKET Summary of Last Lecture Challenge 2: Reducing the Cost of Small, Dispersed Transactions Challenge 3: Managing Informality Risk Managing Informality Risk Nothing will suspend motivation faster than interrupted access. I recently learned of an African bank that began a small pilot microloan program. Managing Informality Risk As loans were repaid, they were not renewed, on the grounds that the loan capital set aside for the poor should be spread to as many people as possible— a typical charity-based intuition. Managing Informality Risk Clients got wind that the first loan would be the only loan. Repayments plummeted, and the bank dropped the pilot. The second insight is about cost-effective risk management. Managing Informality Risk Because loans are small, one default does not matter. This concept allows loans to be made with very simple assessment and documentation procedures, reducing underwriting costs. Managing Informality Risk What does matter is a pattern of default. Unlike the relaxed approach of consumer lenders to the middle class, who believe they will be paid eventually (and may profit from delinquency through late fees), Managing Informality Risk Microfinance lenders to the informal sector keep a tight rein on delinquency. They know that default risk can spread virally through a client population if clients believe delinquency is tolerated. Managing Informality Risk Microlenders manage this risk energetically with capable information systems and immediate follow-up of every late payment. Managing Informality Risk Another troublesome aspect of informality for bankers is lack of documentation and record keeping. Bankers want clear proof that a client is who he says he is, lives in a certain place, owns a plot of land, etc. Managing Informality Risk What do they do with a client who cannot even read the crumpled documents he brings to the bank? Managing Informality Risk There are many solutions to documentation .
