New Economics Papers
on Microfinance
Issue of 2006‒12‒01
four papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Micro-credit, risk coping and incidence of rural-to-urban migration By Quamrul Ahsan
  2. Microfinance with divisible investment projects By BECCHETTI LEONARDO; PISANI FABIO
  3. A Matching of two Promises: Microfinance and Social Responsibility By BECCHETTI LEONARDO; DURANTE RAFFAELLO; SAMBATARO STEFANIA
  4. Marché du crédit et travail décent au Burkina Faso By Adama Zerbo

  1. By: Quamrul Ahsan
    Abstract: The focus of this paper is on the rural poor of south Asia and their struggle to cope with the seasonal risk of unemployment and the ensuing income risks. In the absence of formal credit or insurance markets the rural poor typically resort to, among other options, the following informal strategies to cope with seasonal income risks: (i) seasonal rural-to-urban migration, and (ii) mutual (ex-post) transfers between families of friends and relatives. Access to credit through a microfinance institution could also provide a competing source of insurance. The question raised in this paper is how the access to credit may affect the more traditional/time honoured means of risk coping, such as seasonal migration. Given that credit, i.e., a credit-financed activity, is potentially a substitute for seasonal migration, it is reasonable to argue that easy access to credit (or high return on credit) will lower the incidence of migration. However, there also exists a potential complementarity between the two activities (if implemented jointly) in terms of gains due to diversification of income risks. That is, given that income from migration is not typically subject to the same shocks as income generated by a credit-financed activity, a joint adoption of both activities creates opportunities for diversification of risk in the family incomes portfolio. If the diversification gains are large enough then the adoption of both activities jointly will be preferred to adopting either of the activities individually. In that event, introduction of microfinance in rural societies may result in raising the incidence of migration. The joint adoption case for rural households is modelled using a choice theoretic framework, and exact conditions are derived for when joint adoption is preferable to adoption of a single project. The model of joint adoption is estimated by applying a Bivariate Probit regression model on a single cross-section of household survey data from rural Bangladesh. Our preliminary results show that indeed the probability of participation in migration by household members is positively related to the probability of the household being a credit recipient.
    Keywords: Development, South Asia, Poverty, Microfinance, Rural labour markets, Rural-to-urban migration, Risk-coping strategies
    JEL: D1 D81 J43 J61 O1 Q12 R23
    Date: 2005–06
    Abstract: In this paper we examine how the traditional results of the microfinance literature change under the project divisibility assumption. We show that, under standard debt contracts, loan size and borrower profits are unchanged when lending to uncollateralized borrowers with an individual lending or with a group lending/joint liability scheme, as the positive effect of the latter on bank risk is offset by a negative effect on borrowers’ optimal loan size. We also show that participated (debt plus profit sharing) loan contracts which reduce the lending rate (with respect to standard debt contracts) generate higher loan size and output, but lower borrower profits. Such contracts, however, cannot be enforced in presence of ex post hidden information, unless costly state verification by the lender is possible and economically convenient. We finally show that a problem of borrower heterogeneity may be solved by the lender with a participated loan/group lending scheme since, in this case, it is possible to devise a menu of contracts discriminating among heterogeneous quality groups. In such case we show that, under reasonable parametric conditions, a participated loan/group lending contract ensures higher profits to the high quality borrower than a standard debt individual lending contract.
    Date: 2006–10
    Abstract: A relevant and increasing share of “socially responsible” (SR) depositors in Italy and in other European countries voluntarily accept reductions of deposit rates when their savings are used to support microfinance institutions. In this paper, we compare two alternative ways of using this money in group lending schemes: direct reduction of microfinance lending rates, constitution of a guarantee fund for reducing insurance costs of microfinance lending institutions. We evaluate the effects of these two alternative schemes on borrowers’ welfare and on loans conditions under different discriminating assumptions usually considered in the microfinance literature such as the heterogeneity of borrowers’ types, borrowers’ moral hazard, group size and projects’ correlation. Our main results show that, when types are homogeneous and effort is exogenous, SR savings increase borrowers’ welfare, reduce lending rates and the relative weakness of group lending schemes when projects are positively correlated. In this framework SR savings thereby reduce the wedge between socially and individually optimal amount of projects financed by the bank. SR savings are also shown i) to weaken incentives for assortative matching when borrowers are heterogeneous, ii) to raise optimal effort in cooperative and non cooperative games in which effort is endogenous and moral hazard effects are taken into account.
    Date: 2006–01
  4. By: Adama Zerbo (CED / IFReDE-GRES, Université Montesquieu Bordeaux IV)
    Abstract: Cette étude visait à dégager des pistes de réflexions pour une meilleure coordination des politiques visant à faciliter l’accès au crédit et à optimiser son allocation dans l’économie pour plus de travail décent au Burkina Faso. Elle montre que le marché du crédit burkinabé est compartimenté en quatre segments qui se distinguent par les mécanismes d’offre de crédit, de gestion de l’information et du risque de crédit. Par ailleurs, l’appel public à l’épargne de l’Etat s’apparente au financement des dépenses publiques par le circuit bancaire au regard de ses effets directs significatifs sur le marché crédit. Le cloisonnement du marché du crédit réduirait significativement l’efficacité des instruments traditionnels de politique monétaire, ainsi que l’impact du marché du crédit sur le travail décent. Pour y remédier, les pistes de réflexions suivantes méritent d’être approfondies : (i) la mise en place d’un système de garanties accessible aux petites et moyennes entreprises, (ii) le renforcement de l’efficacité du système judiciaire pour améliorer le taux de recouvrement des crédits en souffrance afin de réduire l’aversion des banquiers pour le risque, (iii) l’accroissement de la disponibilité et la fiabilité de l’information comptable au niveau des PME afin de permettre aux créanciers d’apprécier le risque à prendre et (iv) le développement à l’horizontale et à la verticale du micro-crédit pour une complémentarité efficace entre crédit bancaire et micro-crédit. This paper aimed to underline reflections tracks for better coordination of credit market policies in Burkina Faso so as to boost decent work. It shows that Burkina Faso credit market has four compartments which are characterized by their credit supply, information and risk management mechanisms. In addition, Treasury bond emission remains equal to the financing of public expenditure by banking system in regard to his effects on credit market. The segmentation of credit market would significantly reduce effective of monetary policy and impact of credit market on decent work. To cure it, following reflections tracks have to be thorough: (i) creating guarantees device accessible to SME; (ii) reinforcing legal system effectiveness to improve the recovery rate of overdue credits in order to reduce bankers’ aversion for risk; (iii) improving of availability and reliability of hard information in SME in turn to allow creditors to assess the risk; (iv) horizontal and vertical development of micro-credit for effective complementary between banking system and microfinance. (Full text in french)
    JEL: E3 J5
    Date: 2006–11

This issue is ©2006 by Aastha Pudasainee and Olivier Dagnelie. 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.