| Abstract: |
This paper shows that subsidising the cost of capital restricts the ability of
the poorest to participate in the group lending mechanisms that include saving
opportunities. We document the group lending mechanism used by a typical
microfinance lender in Haryana, India. Individuals can participate in the
group either as a borrower or a saver. The lender requires that the borrower
partly self-finance their project with their own cash wealth. Consequently, a
borrower requires a minimum amount of cash wealth to borrow. The poorest
participate in the group by co-financing the borrower's project with their
meagre savings. In return, they obtain higher than market returns on their
savings. Subsidising the cost of capital reduces the cash wealth required to
participate in the group as a borrower. Conversely, it increases the cash
wealth required to participate as a saver, thus curtailing the opportunity for
the poorest to enrich themselves. |