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IIBF Microfinance study materials
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IIBF Microfinance practice questions

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Question 1Microfinance - fundamentals, products and delivery models

A microfinance institution lends to a group of five women who each guarantee the others' repayment. What is this delivery model called?

  1. Warehouse receipt financing
  2. Joint liability group lending Correct answer.
  3. Village banking with external guarantors
  4. Individual collateralised lending

Explanation

Joint liability group lending makes each member liable for the defaults of the others, substituting peer monitoring and social sanction for physical collateral. This is the classic Grameen-style mechanism designed for clients without pledgeable assets.

Question 2Microfinance - fundamentals, products and delivery models

Which term describes the practice of a microfinance client borrowing from one lender to repay another?

  1. Portfolio seasoning
  2. Graduation
  3. Cross-subsidisation
  4. Multiple borrowing Correct answer.

Explanation

Multiple borrowing occurs when a client holds simultaneous loans from several lenders, often using one loan to service another. It inflates reported outreach and can mask over-indebtedness in a saturated market.

Question 3Microfinance - fundamentals, products and delivery models

In microfinance terminology, what does the repayment rate of a loan portfolio typically measure?

  1. The ratio of savings deposits to outstanding loans
  2. The proportion of clients who have graduated to larger loans
  3. The interest income earned per active borrower
  4. The share of amounts due that have actually been collected Correct answer.

Explanation

The repayment rate compares amounts collected with amounts falling due during a period, expressing collection performance. It is a flow measure and differs from portfolio-at-risk, which looks at the outstanding balance in arrears.

Question 4Microfinance - fundamentals, products and delivery models

A microfinance product that combines a small loan with a compulsory savings balance that must be maintained is best described as which of the following?

  1. An equity investment in the client's enterprise
  2. A trade credit facility
  3. A composite loan-and-savings product Correct answer.
  4. A pure consumption loan

Explanation

Compulsory or linked savings attached to a loan creates a composite product where part of the client's cash is retained as security. It lowers lender risk but raises the effective cost of borrowing for the client.

Question 5Microfinance - fundamentals, products and delivery models

Which of the following best describes the role of a self-help group (SHG) in microfinance delivery?

  1. Members pool savings and lend internally, later linking to bank credit Correct answer.
  2. A commercial bank directly appraises each member's collateral
  3. An insurer underwrites individual default risk for each member
  4. A donor grants funds that are never repaid

Explanation

Self-help groups begin as savings and internal lending collectives and later use their track record to access bank credit, often through SHG-bank linkage. The group structure provides screening and monitoring that individual small borrowers lack.

Question 6Microfinance - fundamentals, products and delivery models

What is the primary purpose of a group fund maintained by a joint liability group?

  1. To meet central bank capital adequacy norms
  2. To pay dividends to external shareholders
  3. To provide a first-loss buffer and emergency credit to members Correct answer.
  4. To fund the salaries of loan officers

Explanation

A group fund is built from member contributions and serves as an internal reserve for emergencies and a first-loss cushion for the lender. It strengthens group cohesion and repayment discipline.

Question 7Microfinance - fundamentals, products and delivery models

A microfinance institution charges a flat 12% interest on a one-year loan of 10,000 with equal monthly principal repayments. Why is the effective interest rate higher than 12%?

  1. Because flat rates ignore processing fees only
  2. Because the nominal rate excludes inflation by law
  3. Because the average outstanding balance is roughly half the original principal Correct answer.
  4. Because monthly repayment is prohibited in microfinance

Explanation

With equal principal instalments the borrower repays part of the principal each month, so the average balance outstanding is about half the stated loan. Interest computed on the full original amount therefore yields an effective rate roughly double the flat rate.

Question 8Microfinance - fundamentals, products and delivery models

A field officer notices that a borrower's business stock has fallen sharply and the group has stopped meeting weekly. Which risk is being signalled most directly?

  1. Early default risk requiring closer monitoring Correct answer.
  2. Liquidity risk from depositor withdrawals
  3. Foreign exchange risk on donor funds
  4. Interest rate risk on the institution's balance sheet

Explanation

Falling business stock and disrupted group meetings are behavioural early-warning signs of repayment difficulty. Loan officers are trained to act on such signals before arrears appear on the books.

Question 9Microfinance - fundamentals, products and delivery models

Which pricing practice most clearly conflicts with the principle of transparent client disclosure?

  1. Stating the annualised percentage rate in the loan agreement
  2. Providing a repayment schedule showing total cost of credit
  3. Giving clients a written summary of all charges before disbursement
  4. Quoting only the flat monthly interest rate while omitting processing fees and compulsory savings Correct answer.

Explanation

Transparency requires disclosure of all charges so clients can compare the true cost of credit. Quoting a flat rate while hiding fees and compulsory savings obscures the effective cost and is a recognised consumer-protection failure.

Question 10Microfinance - fundamentals, products and delivery models

A microfinance institution wants to reduce credit risk among first-time borrowers with no credit history. Which design feature is most consistent with microfinance practice?

  1. Large single disbursements to test client capacity quickly
  2. Charging no interest to lower the client's burden
  3. Requiring registered land titles as security
  4. Small initial loan sizes that grow with proven repayment Correct answer.

Explanation

Step-lending starts with small amounts and increases exposure only after repayment is demonstrated, containing losses while building a credit record. This sequencing is a core risk-management tool in microfinance.

Question 11Microfinance - fundamentals, products and delivery models

What distinguishes a credit guarantee fund from a direct loan in microfinance delivery?

  1. It replaces the need for any credit appraisal
  2. It subsidises the interest rate paid by borrowers
  3. It shares default losses with the lender instead of providing funds to the borrower Correct answer.
  4. It provides equity capital to the microfinance institution

Explanation

A guarantee fund does not lend to clients; it absorbs an agreed share of losses so lenders will extend credit to clients they would otherwise reject. It is a risk-sharing instrument that sits behind the loan.

Question 12Microfinance - fundamentals, products and delivery models

A microfinance institution reports portfolio at risk greater than 30 days of 8%. How should this be interpreted?

  1. Eight per cent of interest income was written off this year
  2. Eight per cent of the outstanding portfolio balance has instalments overdue by more than 30 days Correct answer.
  3. Eight per cent of all loans ever disbursed have defaulted permanently
  4. Eight per cent of clients have left the institution

Explanation

Portfolio at risk measures the outstanding balance of loans with any instalment overdue beyond the stated threshold as a share of the total outstanding portfolio. It is a stock-based indicator of asset quality, not a cumulative default or attrition measure.

Question 13Microfinance - fundamentals, products and delivery models

Which savings product design is most appropriate for a poor household facing irregular daily income?

  1. A deposit available only to clients borrowing above a set amount
  2. A deposit requiring a land title as security
  3. A fixed deposit locked for five years with a high minimum
  4. A flexible deposit account with low minimum balance and frequent collection Correct answer.

Explanation

Irregular cash flows call for small, frequent, low-threshold deposits that match daily or weekly income patterns. Flexible collection supports the habit of saving without imposing unaffordable minimums.

Question 14Microfinance - fundamentals, products and delivery models

What is the main function of micro-insurance in a microfinance product mix?

  1. To protect clients and lenders against shocks that cause repayment failure Correct answer.
  2. To increase the interest rate charged on loans
  3. To replace savings accounts entirely
  4. To serve as collateral for group loans

Explanation

Micro-insurance covers health, life, crop or asset risks that can wipe out a household's capacity to repay. By transferring those shocks, it stabilises both client welfare and lender cash flows.

Question 15Microfinance - fundamentals, products and delivery models

An NGO microfinance programme converts into a regulated non-bank finance company. What is the most likely primary reason?

  1. To gain access to deposits and commercial funding under a formal licence Correct answer.
  2. To avoid all reporting to the central bank
  3. To eliminate the need for loan officers
  4. To reduce the number of clients it serves

Explanation

Transformation into a regulated entity allows an institution to mobilise deposits and commercial capital and to scale sustainably. It also brings prudential supervision, which is the trade-off for those funding options.

Question 16Microfinance - fundamentals, products and delivery models

Which feature most clearly identifies a village banking model?

  1. A single borrower pledging gold jewellery
  2. A bank branch serving salaried employees
  3. A government cash transfer programme
  4. A group of 15 to 30 members that pools savings and on-lends a revolving fund Correct answer.

Explanation

Village banks are larger groups that accumulate member savings and a loan fund, then on-lend internally under group management. The revolving internal fund and larger membership distinguish them from small joint liability groups.

Question 17Microfinance - fundamentals, products and delivery models

A client repays on time but the institution's records show the loan officer collected the instalment and kept it. Which control failure does this illustrate?

  1. Inadequate interest rate pricing
  2. Weak internal control over cash handling and reconciliation Correct answer.
  3. Poor product marketing
  4. Excessive portfolio diversification

Explanation

Fraud of this kind points to gaps in segregation of duties, receipting and reconciliation of collections. Strong internal controls require timely recording and independent verification of cash received.

Question 18Microfinance - fundamentals, products and delivery models

Which characteristic best distinguishes microcredit from conventional retail lending?

  1. Small loan sizes and cash-flow-based appraisal for clients without formal collateral Correct answer.
  2. Loans issued only to registered companies
  3. Repayment terms extending beyond ten years
  4. Interest rates set below the central bank policy rate

Explanation

Microcredit is defined by small amounts and appraisal based on household cash flow and character rather than formal collateral or financial statements. This makes it accessible to informal-sector borrowers.

Question 19Microfinance - fundamentals, products and delivery models

A microfinance institution sets a loan limit so that the client's total debt service does not exceed a fixed share of household income. What is this practice called?

  1. Debt-service capacity assessment Correct answer.
  2. Interest rate benchmarking
  3. Loan-loss provisioning
  4. Portfolio securitisation

Explanation

Assessing debt-service capacity compares repayment obligations with verified household cash flow to prevent over-indebtedness at origination. It is a front-end underwriting control rather than a post-disbursement accounting treatment.

Question 20Microfinance - fundamentals, products and delivery models

Which of the following is the clearest example of a social performance indicator in microfinance?

  1. Return on equity for shareholders
  2. Debt-to-equity ratio of the institution
  3. Percentage of clients living below a defined poverty line Correct answer.
  4. Cost per loan disbursed

Explanation

Social performance measurement tracks whether the institution reaches and benefits its intended poor and excluded clients. Poverty outreach indicators such as the share of clients below a poverty line are central to that assessment.

Question 21Microfinance - fundamentals, products and delivery models

A regulator caps microfinance interest rates below the level needed to cover the high transaction costs of small loans. What is the most likely market outcome?

  1. Repayment rates improve because borrowers pay less
  2. Lenders expand outreach to the poorest clients
  3. Lenders ration credit and shift toward larger, lower-cost borrowers Correct answer.
  4. Loan sizes fall and transaction costs decline

Explanation

Binding rate ceilings can make small loans loss-making, so institutions ration credit and favour larger or urban clients, weakening outreach to the poorest. This is a well-documented unintended consequence of interest caps.

Question 22Microfinance - fundamentals, products and delivery models

Two institutions report the same 95% repayment rate, but one calculates it on amounts due and the other on the number of instalments. Why does this comparability problem matter for an analyst?

  1. Repayment rates are always identical across institutions by regulation
  2. The two denominators measure different things, so the same headline figure can hide different arrears levels Correct answer.
  3. Amounts-due methods ignore all overdue loans
  4. Only instalment-count methods are legally permitted

Explanation

A rate based on amounts due weights large loans, while an instalment-count rate weights many small loans equally, so identical percentages can conceal different arrears profiles. Analysts must standardise definitions before comparing asset quality.

Question 23Microfinance - fundamentals, products and delivery models

An institution introduces a flexible repayment schedule aligned to harvest income instead of fixed monthly instalments. Which risk is it primarily trying to manage?

  1. Currency depreciation on foreign borrowing
  2. Excess liquidity in the institution's treasury
  3. Seasonal cash-flow mismatch leading to avoidable default Correct answer.
  4. Loan officer fraud in cash collection

Explanation

Agricultural clients receive income in lumps at harvest, so monthly instalments create timing mismatches even for solvent borrowers. Aligning repayment with cash-flow seasonality reduces technical defaults without weakening credit standards.

Question 24Microfinance - fundamentals, products and delivery models

Why can joint liability group lending weaken over time as members become more experienced borrowers?

  1. Group funds are confiscated by the regulator on maturity
  2. Interest rates automatically rise for experienced groups
  3. Group members are legally barred from individual borrowing after five years
  4. Members gain access to individual loans, reducing their stake in peer monitoring Correct answer.

Explanation

Once members build credit histories, individual lenders offer them loans, so the value of continued group membership and peer monitoring declines. This erosion of joint liability incentives is a recognised dynamic in maturing microfinance markets.

Question 25Microfinance - fundamentals, products and delivery models

A microfinance institution reports strong growth in gross loan portfolio but rising portfolio at risk and falling repeat-client rates. Which interpretation is most defensible?

  1. Portfolio at risk falls automatically as the portfolio grows
  2. The institution has solved its asset-quality problem
  3. Repeat-client rates are irrelevant to portfolio quality
  4. Growth may be driven by weaker new clients rather than by deepening relationships with existing ones Correct answer.

Explanation

Simultaneous portfolio growth, rising arrears and declining retention suggest expansion is coming from marginal new borrowers rather than from established clients. Strong outreach figures can therefore mask deteriorating credit quality.

Question 26Microfinance - fundamentals, products and delivery models

In microfinance terminology, what does the term 'microcredit' specifically refer to?

  1. The provision of small loans to low-income clients who lack access to formal banking Correct answer.
  2. The provision of insurance products to low-income households
  3. The provision of remittance services to migrant workers
  4. The provision of savings accounts to low-income households

Explanation

Microcredit is a core microfinance product and refers specifically to small loans extended to poor or low-income borrowers who are typically excluded from mainstream commercial banking. Savings, insurance, and remittances are separate microfinance services, not microcredit.

Question 27Microfinance - fundamentals, products and delivery models

Which delivery model is characterized by a self-selected group of borrowers who jointly guarantee each other's loans, with no physical collateral required?

  1. Credit guarantee fund
  2. Joint liability group lending Correct answer.
  3. Village banking
  4. Individual lending with collateral

Explanation

Joint liability group lending relies on mutual guarantee among group members in place of physical collateral; members are jointly responsible for repayment. Village banking involves a larger group with an internal fund, and credit guarantee funds are third-party risk-sharing arrangements.

Question 28Microfinance - fundamentals, products and delivery models

What is the primary function of a microfinance institution's loan officer during the appraisal stage?

  1. To prepare the institution's financial statements
  2. To assess the borrower's repayment capacity and business viability Correct answer.
  3. To design new savings products for the institution
  4. To collect overdue instalments from delinquent clients

Explanation

During appraisal the loan officer evaluates the client's business, cash flows, and ability to repay, which determines whether credit should be granted. Collection, product design, and accounting are separate functions.

Question 29Microfinance - fundamentals, products and delivery models

Which of the following best describes the 'graduation' approach in microfinance?

  1. Graduating loan officers to senior management positions
  2. Moving clients from ultra-poor safety-net support to sustainable microfinance services Correct answer.
  3. Graduating from group lending to individual lending for all clients
  4. Graduating the institution from NGO status to a regulated bank

Explanation

The graduation approach is a sequenced intervention that combines social assistance, livelihood support, and savings/credit to help the ultra-poor move into sustainable self-employment and microfinance. It is client-focused, not staff- or institution-focused.

Question 30Microfinance - fundamentals, products and delivery models

In group lending, what is the main purpose of requiring members to make a small regular savings contribution to a group fund?

  1. To build a pooled reserve that can cover a member's default Correct answer.
  2. To fund the institution's marketing campaigns
  3. To pay the salaries of the institution's loan officers
  4. To satisfy central bank capital adequacy rules

Explanation

Group funds create a shared reserve that members can draw on to cover a default or emergency, reinforcing mutual accountability. They are not used for staff salaries, regulatory capital, or marketing.

Question 31Microfinance - fundamentals, products and delivery models

Which of the following is a typical feature of a microfinance loan product?

  1. Small loan amounts with short repayment tenors Correct answer.
  2. Loans secured only by real estate mortgages
  3. Loans disbursed exclusively to salaried employees
  4. Large loan amounts with long repayment tenors

Explanation

Microfinance loans are typically small in size and short in tenor to match the cash flows of microenterprises and low-income households. They are usually uncollateralized and target self-employed or informal-sector clients rather than salaried employees.

Question 32Microfinance - fundamentals, products and delivery models

What is the primary source of funds for a typical microfinance institution's on-lending operations?

  1. Client savings deposits and borrowed funds from banks or development finance institutions Correct answer.
  2. Equity capital from stock exchange listings
  3. Donations from international NGOs exclusively
  4. Government budget allocations alone

Explanation

Microfinance institutions fund their loan portfolio mainly through client savings (where permitted) and wholesale borrowings from banks, development finance institutions, or apex funds. Government budgets, stock listings, and NGO donations are not the primary sources for most institutions.

Question 33Microfinance - fundamentals, products and delivery models

Which of the following best defines 'financial inclusion' in the context of microfinance?

  1. The elimination of all interest charges on small loans
  2. Mandatory lending to all applicants regardless of creditworthiness
  3. The provision of free financial services to all citizens
  4. Access to appropriate financial services at an affordable cost for all segments of society Correct answer.

Explanation

Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs. It does not require free services, mandatory lending, or zero interest.

Question 34Microfinance - fundamentals, products and delivery models

A microfinance institution wants to introduce a product that allows clients to build a lump sum for school fees or business expansion. Which product design best matches this need?

  1. A short-term working capital loan
  2. A recurring deposit or contractual savings product with a fixed term Correct answer.
  3. A credit-linked insurance policy
  4. A demand deposit account with no withdrawal restrictions

Explanation

A recurring deposit or contractual savings product encourages regular contributions and accumulates a lump sum at maturity, matching planned future expenses. Demand deposits lack commitment, loans create debt rather than savings, and insurance addresses risk rather than accumulation.

Question 35Microfinance - fundamentals, products and delivery models

A microfinance institution uses a 'progressive lending' approach. What does this mean in practice?

  1. Loan sizes increase in successive cycles based on demonstrated repayment performance Correct answer.
  2. Interest rates increase with each loan cycle
  3. Collateral requirements increase with each loan cycle
  4. Loan tenors shorten with each loan cycle

Explanation

Progressive lending rewards reliable repayment by gradually increasing loan amounts, allowing clients to grow their businesses while the institution manages risk. It does not refer to interest rates, collateral, or tenor changes.

Question 36Microfinance - fundamentals, products and delivery models

A microfinance institution wants to reduce the risk of loan diversion to non-productive consumption. Which design feature is most directly aimed at this?

  1. Disbursing the loan in kind or in tranches tied to business milestones Correct answer.
  2. Requiring a guarantor with salaried income
  3. Lengthening the loan tenor to reduce monthly instalments
  4. Increasing the loan size to meet all household needs

Explanation

In-kind or tranche-based disbursement ensures that funds are used for the intended business purpose and reduces diversion. Larger loans, longer tenors, and salaried guarantors do not directly prevent diversion.

Question 37Microfinance - fundamentals, products and delivery models

In a village banking model, what is the role of the internal account?

  1. It pools member savings and provides a revolving loan fund managed by the group Correct answer.
  2. It holds the institution's capital and is managed by the head office
  3. It is a commercial bank account used to pay staff salaries
  4. It is a regulatory reserve account held at the central bank

Explanation

Village banks pool member savings into an internal account that is used to make loans to members, creating a self-managed revolving fund. It is not an institutional capital account, payroll account, or central bank reserve.

Question 38Microfinance - fundamentals, products and delivery models

A microfinance institution introduces a 'flexible loan' that allows clients to withdraw and repay funds as needed within a credit line. Which risk does this product most directly increase?

  1. Operational risk because loan officers cannot monitor clients
  2. Credit risk because clients no longer repay
  3. Liquidity risk for the institution due to unpredictable drawdowns Correct answer.
  4. Market risk because interest rates fluctuate

Explanation

Flexible credit lines allow clients to draw funds unpredictably, which can strain the institution's liquidity management. Credit risk may be managed through limits, and operational or market risks are not the most direct consequence.

Question 39Microfinance - fundamentals, products and delivery models

Which of the following best explains why microfinance institutions often use weekly or bi-weekly repayment schedules?

  1. Frequent repayment reduces the total interest paid by the client
  2. Frequent repayment eliminates the need for loan appraisal
  3. Frequent repayment allows the institution to avoid regulatory reporting
  4. Frequent repayment matches the cash flows of petty trade and enables early detection of problems Correct answer.

Explanation

Frequent instalments align with the short cash cycles of microenterprises and allow loan officers to detect repayment difficulties early. They do not reduce total interest, replace appraisal, or affect regulatory reporting.

Question 40Microfinance - fundamentals, products and delivery models

What is the primary purpose of a 'credit guarantee fund' in microfinance delivery?

  1. To provide direct loans to microborrowers at subsidized rates
  2. To share default risk with lenders and encourage them to lend to microborrowers Correct answer.
  3. To regulate microfinance institutions
  4. To collect savings deposits from microborrowers

Explanation

A credit guarantee fund absorbs a portion of lenders' losses, reducing their risk and encouraging them to extend credit to microborrowers. It does not lend directly, take deposits, or regulate institutions.

Question 41Microfinance - fundamentals, products and delivery models

A microfinance institution offers a 'group loan' where each member receives an individual loan but the group guarantees repayment. What is the main advantage of this structure over individual lending?

  1. It allows the institution to charge higher interest rates
  2. It eliminates credit risk entirely
  3. It reduces screening and monitoring costs for the institution through peer selection and pressure Correct answer.
  4. It removes the need for loan documentation

Explanation

Group liability leverages peer screening, monitoring, and enforcement, lowering the institution's information and monitoring costs. It does not eliminate credit risk, justify higher rates, or remove documentation requirements.

Question 42Microfinance - fundamentals, products and delivery models

Which of the following best describes 'individual lending' in microfinance?

  1. Loans made exclusively to salaried employees with formal credit histories
  2. Loans made only against physical collateral
  3. Loans made to a group of borrowers who jointly guarantee repayment
  4. Loans made to a single borrower based on an assessment of that borrower's cash flow and character Correct answer.

Explanation

Individual lending assesses the borrower's own repayment capacity and character, often using relationship-based appraisal. It is distinct from group lending and does not require formal salary or physical collateral.

Question 43Microfinance - fundamentals, products and delivery models

A microfinance institution is designing a product for women microentrepreneurs who need working capital for market trading. Which feature is most important to align with their cash flow?

  1. Small daily or weekly instalments collected at the market or through mobile money Correct answer.
  2. A loan disbursed in a lump sum with monthly instalments at a bank branch
  3. A loan requiring land title as collateral
  4. A single bullet repayment at the end of a 24-month term

Explanation

Market traders have frequent small cash inflows, so small, frequent instalments collected conveniently align with their business cycle. Bullet repayments, inconvenient branch visits, and collateral requirements are poorly suited to this client segment.

Question 44Microfinance - fundamentals, products and delivery models

What is the main reason microfinance institutions often require borrowers to attend regular group meetings?

  1. To comply with stock exchange listing rules
  2. To recruit new loan officers
  3. To collect income tax from members
  4. To facilitate peer monitoring, repayment collection, and financial education Correct answer.

Explanation

Group meetings create a forum for peer monitoring, collective repayment, and financial literacy, which are central to the group lending methodology. They are not linked to stock exchange rules, tax collection, or staff recruitment.

Question 45Microfinance - fundamentals, products and delivery models

A microfinance institution introduces mobile money repayment. What is the most likely benefit for the institution?

  1. Elimination of credit risk
  2. Higher interest rates charged to clients
  3. Reduced need for loan appraisal
  4. Lower transaction costs and reduced cash handling risk Correct answer.

Explanation

Mobile repayment reduces the cost of cash collection and the risk of handling cash, improving operational efficiency. It does not raise interest rates, eliminate credit risk, or remove the need for appraisal.

Question 46Microfinance - fundamentals, products and delivery models

In microfinance, what does the term 'loan loss provisioning' refer to?

  1. Providing a discount on interest for timely repayment
  2. Setting aside funds to cover expected losses from loans that may not be repaid Correct answer.
  3. Lending to clients who have defaulted previously
  4. Charging a fee to clients who repay early

Explanation

Provisioning is an accounting practice that recognizes expected credit losses by setting aside reserves. It is not a fee, a discount, or a lending policy.

Question 47Microfinance - fundamentals, products and delivery models

Which of the following is the most significant operational challenge for a microfinance institution using the group lending model?

  1. Compliance with stock exchange disclosure requirements
  2. Excessive collateral valuation costs
  3. Recruiting highly paid investment bankers
  4. High transaction costs of managing many small loans and frequent meetings Correct answer.

Explanation

Group lending involves many small transactions and regular meetings, which raise administrative costs per loan. Collateral valuation, stock exchange compliance, and investment bankers are not typical concerns of microfinance group lending.

Question 48Microfinance - fundamentals, products and delivery models

A microfinance institution wants to expand into a remote rural area with low population density. Which delivery model is likely to be most cost-effective?

  1. Mobile banking units or agent networks using digital technology Correct answer.
  2. A credit guarantee fund managed from the capital city
  3. Individual lending with physical collateral
  4. A large urban branch with walk-in services

Explanation

Mobile units and agent networks reduce the fixed cost of physical branches in sparsely populated areas. Urban branches, collateral-based individual lending, and remote guarantee funds are less suited to remote rural delivery.

Question 49Microfinance - fundamentals, products and delivery models

A microfinance institution observes that group members are increasingly reluctant to pressure defaulting peers because they fear social conflict. What is the most likely consequence for the institution?

  1. The institution will no longer need to monitor groups
  2. Joint liability becomes less effective and default rates may rise Correct answer.
  3. The institution's administrative costs will fall
  4. Group cohesion will automatically improve repayment

Explanation

Joint liability relies on peer pressure; if members avoid enforcing it, the mechanism weakens and defaults can increase. Administrative costs may rise due to collection efforts, and monitoring remains necessary.

Question 50Microfinance - fundamentals, products and delivery models

A microfinance institution considers switching from group lending to individual lending for its most experienced clients. What is the main risk of this strategy?

  1. Group members will automatically default on all loans
  2. Individual lending always requires higher subsidies
  3. Loss of peer monitoring and joint liability may increase credit risk for these clients Correct answer.
  4. The institution will be unable to charge any interest

Explanation

Experienced clients may have established credit histories, but moving them to individual lending removes peer monitoring and joint liability, potentially increasing risk if appraisal is weak. Individual lending does not inherently require subsidies or eliminate interest charges.