Credit Unions and the Supply of Insurance to Low Income Households

The low-income credit union modelled in this paper is an institution with a particular form of contract designed to allow it to operate among agents that are excluded from using banks. Specifically credit unions deal with those potentially on the minimum income guarantee. The challenge facing them is to distinguish between those whose motivation is consumption smoothing and those who seek the largest credible loan with the intention of defaulting. This is achieved by setting the level of the minimum deposit and the loan and deposit rates such that an intentional defaulter has no incentive to join the credit union.