In lending, the agency problem causes moral hazard.

True

False

In a recentFarming Times article,a newonline lending platform called MicroGrain was reviewed. The founder and CEO commented, "...Our capital and operating costs are half of traditional microfinance companies, because we are not dependent on banks for capital and do not have a brick and mortar structure..." MicroGrainlends money to rural entrepreneurs at interest rates ranging between 10 per cent and 15 per cent as compared to traditional microfinance rates of 24 per cent to 36 per cent. Repayment rate among borrowers is 96% and increasing over time. Using the break even R formula we discussed in class, how can you explain the lower rates charged by MicroGrain.

R = k / [q+(1-q)p]

k= gross cost of bank

q =percentage of safe borrower

R =bank rate

p =probability of obtaining revenue ( 0

a.	k is higher and q is higher
b.	k is lower and q is higher
c.	k is higher and q is lower
d.	k is lower and q is lower

A Rotating Savings and Credit Association ("ROSCA")is an informal self-selected group where members agree to contribute a fixed amountat regular intervals (example: weekly)to a common pot of money that is allocated to one member of the group each period using apre-agreed method (vote, lottery,pre-agreedrotation, etc.). The clients agree to allow members to join and are aware of their sources of cash flow. Based on the reading from theMicrofinanceHandbook, which of the following is correct about a ROSCA?

a.	Moral hazard existsbecauseindividuals live near one another and can monitor behavior
b.	Adverse selection is increased because the participants know each other and must approve people to join
c.	Moral hazard exits becausemembers may drop out or run away with the money
d.	Moral hazard is reduced byprogressive lending

A banks break even interest rate is determined by the following equation from the reading:

R = k / [q+(1-q)p]

k= gross cost of bank

q =percentage of safe borrower

R =bank rate

p =probability of obtaining revenue ( 0

What would cause the overall bank rate R to decrease?

a.	None of the above
b.	A decrease in q, percentage of safe borrowers
c.	An increase in q, percentate of safe borrowers
d.	A increase in k, gross cost of capital to the bank

Which of the following creates Ex AnteMoral Hazard as it relates tomicroloans?

a.	Borrower can earn a higher wage elsewhere
b.	Borrower can take the profits and leave town instead of repay bank
c.	None of the above
d.	Profits are higher than principle and interest payment to lender

In lending, the agency problem causes moral hazard.

True

False

Microfinance clients cannot repay loans with more than their current (unpredictable) income. This is an example of:

a.	Sixteen Decisions
b.	Agency Problems
c.	Production function
d.	Limited Liability

Which of the following creates Ex Post Moral Hazard as it relates to microloans?

a.	None of the above
b.	Profits are lower than principle and interest payment to lender
c.	Borrower can earn a higher wage elsewhere
d.	Borrower can claim lower profits than were actually earned on product sales