An Introduction to Microcredit: Why Money is Flowing from the Rich to the Poor

Cahiers du CEREN Working Paper No. 21

13 Pages Posted: 4 Feb 2008 Last revised: 2 Nov 2013

See all articles by Arvind Ashta

Arvind Ashta

CEREN EA 7477 Burgundy School of Business - Université Bourgogne Franche-Comté

Date Written: December 1, 2007

Abstract

The paper examines why capital didn't flow from the rich to the poor. The problems identified are categorized in three broad categories: lack of complementary human capital, information asymmetries and transaction costs for small loan sizes. It explains how moneylenders solve the information asymmetry problems. It then shows that recently, microcredit has taken the world by storm. This development has considerably impacted economies at the grass root levels. The paper therefore examines how Microfinance institutions have overcome the obstacles to mobility of capital, notably those relating to information asymmetry and transaction costs, but also, in some cases, those related to complementary human capital. The reduction in information asymmetry by Microfinance institutions is not done in the same way as by moneylenders. Finally, the paper explains how these microfinance institutions obtain financing to understand why their costs are lower than those of moneylenders.

A considerably advanced & modified version of this paper has been accepted for publication in the Journal of Economic Issues (forthcoming September 2009) under the title "Microcredit capital flows and interest rates: An Alternative Explanation"

Keywords: Microfinance, poverty, moneylender, information asymmetry, adverse selection, moral hazard, transaction costs

JEL Classification: D00, D10, D2, D4, D8, E22, E31, E41, E43, E5, F2

Suggested Citation

Ashta, Arvind, An Introduction to Microcredit: Why Money is Flowing from the Rich to the Poor (December 1, 2007). Cahiers du CEREN Working Paper No. 21, Available at SSRN: https://ssrn.com/abstract=1090195 or http://dx.doi.org/10.2139/ssrn.1090195

Arvind Ashta (Contact Author)

CEREN EA 7477 Burgundy School of Business - Université Bourgogne Franche-Comté ( email )

29 rue Sambin
21000 Dijon
France

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