New Economics Papers
on Microfinance
Issue of 2005‒10‒15
two papers chosen by
Aastha Pudasainee and Ana Ogarrio

  1. Hierarchy in Microfinance: Embezzlement and the Optimality of Rigid Repayment Schedules and Joint Liability By Doh-Shin Jeon; Domenico Menicucci
  2. The nature of NGO microfinance in Vietnam and stakeholders’ perceptions of effectiveness By James Laurenceson; Hong Son Nghiem

  1. By: Doh-Shin Jeon; Domenico Menicucci
    Abstract: We consider the agency problem of a bank staff member managing microfinancing programs, who can abuse his discretion to embezzle borrowers' repayments. In this context, we study the optimal lending contract. The fact that most borrowers of microfinancing programs are illiterate and live in rural areas where transportation costs are very high make staff's embezzlement particularly relevant as is documented by Mknelly and Kevane (2002). We study the trade-off between the optimal rigid contract and the optimal discretionary contract and how joint liability affects the performance of each contract and the trade-off. Our analysis explains rigid repayment schedules used by the Grameen bank as an optimal response to the bank staff's agency problem. Joint liability reduces borrowers' burden of respecting the rigid repayment schedules by providing them with partial insurance. However, the same insurance can be provided by borrowers themselves under individual liability through a side-contract. We also find that the staff's agency problem creates biases in project selection toward projects of small scale and small risk.
    Keywords: Microfinance, Group Lending, Joint Liability, Embezzlement, Hierarchy, Contract
    JEL: O16 D82 G20
    Date: 2005–09
  2. By: James Laurenceson; Hong Son Nghiem (EAERG - School of Economics, The University of Queensland)
    Abstract: The microfinance industry in Vietnam, particularly those sponsored by non-government organisations (NGOs), has experienced rapid expansion in recent years. While there have been anecdotal reports alluding to their contribution in alleviating poverty, a systematic analysis of this issue has been lacking. In a bid to help address this shortcoming, this paper reports on data that was obtained during a survey and interview process that incorporated various stakeholders including financial donors, NGO-sponsored microfinance institutions (NMPs), village leaders and NMP members and non-members. Firstly, the nature of NMPs is described - their objectives, target groups and the financial products they offer. Secondly, perceptions of NMPs effectiveness are discussed from the standpoint of various stakeholders. NMPs are found to be at a critical juncture. While their activities are widely perceived to contribute to poverty alleviation, their future viability is clouded by donor requirements that they become financially self-sufficient. At the same time, certain government policies make achieving this goal very difficult.

This issue is ©2005 by Aastha Pudasainee and Ana Ogarrio. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.