New Economics Papers
on Microfinance
Issue of 2006‒01‒29
two papers chosen by
Aastha Pudasainee and Ana Ogarrio

  1. Financial performance and outreach : a global analysis of leading microbanks By Morduch, Jonathan; Demirguc-Kunt, Asli; Cull, Robert
  2. Understanding the microenterprise sector to design a tailor-made microfinance policy for Cape Verde By José A. G. Baptista; Jacinto Vidigal da Silva; Joaquim J.S. Ramalho

  1. By: Morduch, Jonathan; Demirguc-Kunt, Asli; Cull, Robert
    Abstract: Microfinance contracts have proven able to secure high rates of loan repayment in the face of limited liability and information asymmetries, but high repayment rates have not translated easily into profits for most microbanks. Profitability, though, is at the heart of the promise that microfinance can deliver poverty reduction while not relying on ongoing subsidy. The authors examine why this promise remains unmet for most institutions. Using a data set with unusually high quality financial information on 124 institutions in 49 countries, they explore the patterns of profitability, loan repayment, and cost reduction. The authors find that institutional design and orientation matter substantially. Lenders that do not use group-based methods to overcome incentive problems experience weaker portfolio quality and lower profit rates when interest rates are raised substantially. For these individual-based lenders, one key to achieving profitability is investing more heavily in staff costs-a finding consistent with the economics of information but contrary to the conventional wisdom that profitability is largely a function of minimizing cost.
    Keywords: Banks & Banking Reform,Economic Theory & Research,Economic Adjustment and Lending,Investment and Investment Climate,Rural Finance
    Date: 2006–02–01
  2. By: José A. G. Baptista (Banco de Cabo Verde); Jacinto Vidigal da Silva (Department of Mangment, University of Évora); Joaquim J.S. Ramalho (Department of Economics, University of Évora)
    Abstract: Two of the central challenges faced by Cape Verde at the present are the high level of unemployment and the increasing proportion of the population that lives below the poverty line. Microenterprise development can be an effective means of addressing both problems in a developing country like Cape Verde, where microenterprises account for about 50% of employment. In this paper we provide a detailed profile of micro firms’ owners and investigate the relationship between their characteristics and the resort to outside seed capital. We find a cluster of factors - the microentrepreneur’s age, gender, level of education and reason for being self-employed - which influence significantly the probability of being in need for external startup capital. The policy implications of these findings for the design of a specific microfinance program for Cape Verde are discussed.
    Keywords: Cape Verde; Microfinance; Microenterprise; Microcredit; Poverty
    JEL: O18 G32
    Date: 2006

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