Group lending was the most striking innovation of the Grameen Bank, and it has been widely imitated by other microfinance initiatives.

(a). How does group lending address the problems that limit the supply of credit

to poor households from traditional formal-sector lenders (e.g., banks)?

(b). A careful study of the operations of the Grameen Bank in the early 1990s

concluded that each dollar of lending increased the consumption expenditures of

borrowing households by 17 cents relative to what they would have been without the

loan (repayment rates were almost 100% so this was net of repayment). Loans were very costly to administer, however, and at the interest rate charged on the loans, the Grameen Bank required a subsidy of 22 cents on every dollar of lending to remain sustainable. In your view, does this look like an effective use of public funds? Would it be better, for example, to reduce the subsidy (i.e., increase the commercial viability of the operation) by charging a higher interest rate?