New Economics Papers
on Microfinance
Issue of 2006‒07‒02
four papers chosen by
Aastha Pudasainee and Ana Ogarrio

  1. The Microfinance Collateralized Debt Obligation: a Modern Robin Hood? By Byström, Hans
  2. Microfinance Games By Dean Karlan; Xavier Gine; Jonathan Morduch; Pamela Jakiela

  1. By: Byström, Hans (Department of Economics, Lund University)
    Abstract: The aim of this paper is to highlight a potentially very fruitful link between micro-entrepreneurs and the international capital markets. We discuss the role structured finance and credit derivatives could play in extending finance to micro-entrepreneurs on a much larger scale than today’s mainly non-commercial microfinance industry. The mechanisms of so called collateralized debt obligations (CDOs) are described and extended to the microfinance world. Finally, a hypothetical, but realistic, example of such a microfinance CDO (MiCDO) is used to discuss the implications of securitization and tranching of microcredits.
    Keywords: commercial microfinance; structured finance; securitization; collateralized debt obligation; MiCDO
    JEL: G15 G21 O16 R51
    Date: 2006–06–18
  2. By: Dean Karlan (Economic Growth Center, Yale University); Xavier Gine (World Bank); Jonathan Morduch (New York University); Pamela Jakiela (University of California, Berkeley)
    Abstract: Microfinance has been heralded as an effective way to address imperfections in credit markets. From a theoretical perspective, however, the success of microfinance contracts has puzzling elements. In particular, the group-based mechanisms often employed are vulnerable to free-riding and collusion, although they can also reduce moral hazard and improve selection. We created an experimental economics laboratory in a large urban market in Lima, Peru and over seven months conducted eleven different games that allow us to unpack microfinance mechanisms in a systematic way. We find that risk-taking broadly conforms to predicted patterns, but that behavior is safer than optimal. The results help to explain why pioneering microfinance institutions have been moving away from group-based contracts.
    Keywords: Microfinance, Group Lending, Information Asymmetries, Contract Theory, Experimental Economics
    JEL: O12 D92 D10 D21 D82 C93
  3. By: Denis H. Acclassato (LEO - Laboratoire d'économie d'Orleans - [CNRS : UMR6221] - [Université d'Orléans])
    Abstract: Microfinance institutions (MFIs) have grown fast in WAEMU surprising political decision makers. They reacted by setting up in the late 90's, a specific legislation. A legal usury rate for credits was defined fixing the borrower ceiling interest rate at 27 percent per year for microfinance institutions and 18 percent for banks. This statutory frame, fast elaborated, revealed early its incapacities and therefore, weakened structures in charge of the regulation of the sector. This structure is confronted with the difficult choice to maintain institutions outside the statutory frame or to apply a rigorous supervision and to precipitate a massive decline of MFIs. This law limits incentives to better governance, the efficiency and the flexibility expected from a good statutory frame. This paper models the behaviour of microfinance institutions in the context of interest rate ceilings and requirement of a minimal level of governance. We use comparative statics to show that a relaxation of the constraint on the usury rate does not lead necessarily to an increase of the borrower interest rate.
    Keywords: regulation, usury ; governance ; microfinance
    Date: 2006–06–26
  4. By: Valentina Hartarska; Steven B. Caudill; Daniel M. Gropper
    Abstract: Microfinance institutions are important, particularly in developing countries, because they expand the frontier of financial intermediation by providing loans to those traditionally excluded from formal financial markets. This paper presents the first systematic statistical examination of the performance of MFIs operating in Eastern Europe and Central Asia. A cost function is estimated for MFIs in the region from 1999-2004. First, the presence of subsidies is found to be associated with higher MFI costs. When output is measured as the number of loans made, we find that MFIs become more efficient over time and that MFIs involved in the provision of group loans and loans to women have lower costs. However, when output is measured as volume of loans rather than their number, this last finding is reversed. This may be due to the fact that such loans are smaller in size; thus for a given volume more loans must be made.
    Keywords: Eastern Europe, banking, microfinance, efficiency
    JEL: G20 G21 O16
    Date: 2006–01–01

This issue is ©2006 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.
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