COOL CLASSES: “Microfinance: Theory, Practice, and Challenges”

This economics course not only explores theoretical explanations for microfinance methodology and evaluates its impacts, but also exposes students to real-world contexts for it via exposure to social entrepreneurs and guest speakers.

Class name: “Microfinance: Theory, Practice, and Challenges”

Taught by: Visiting Assistant Professor of Economics Shannon Mudd

Here’s what Mudd had to say about his class:

Microfinance is the provision of financial services—credit, savings, insurance, payments—to people in poverty who are often excluded from the formal financial sector. Without collateral or developed information systems tracking individual’s financial history, normal banking practices do not apply to people in poverty. Microcredit, the provision of small loans, created innovative ways to reduce the costs of both determining loan eligibility and collecting payments and to align incentives so that recipients want to be pay back.

This class starts with an examination of the potential for poverty traps, situations in which a poor household is unable to achieve higher standards of living due to poor nutrition, healthcare, fertility, and/or education opportunities. We then look at the innovative methods employed in microcredit, evidence of their effectiveness, and evidence of the impact on the poor household who receives microcredit and their neighbors. We go on to look at other microfinance services as well as the organizational and reputational challenges the industry is facing. We bring in innovations from mobile banking to Islamic microfinance. Several guest speakers come to campus to bring their field experiences to add further context to the issues we discuss.

The exposure to social entrepreneurs, as well as to the other members of Investors’ Circle, is one of the great aspects of the course. Students get to observe and interact with people who are using the market to accomplish “mission” goals, shaping the market so that it is not just about profit. When shareholders, like the members of Investors’ Circle, expect more than just profit out of the companies in which they invest, our market system will evolve.

​My hope is that students recognize that households in poverty make decisions like any household, that brilliant products may not be taken up if there is no recognition of the context and incentive structures and that households face multiple constraints. I want them to recognize one of the great values of microfinance is the simple vote of confidence it provides to households to make good decisions. However, microfinance is not a panacea, will not be appropriate for all, and does not address continuing systemic problems. Still, microfinance holds promise and for some, can deliver substantial improvements in their daily lives.

See what other courses the Economics Department is offering this semester.

Image: (cc) Abhishek Reddy

Cool Classes is a series that highlights interesting, unusual, and unique courses that enrich the Haverford experience.