New Economics Papers
on Microfinance
Issue of 2008‒11‒18
five papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Competition and Altruism in Microcredit Markets By Paolo Casini
  2. Those with blue hair please step forward: An economic theory of group formation and application to Cajas Rurales in Honduras By Elias, Carlos; Alwang, Jeffrey
  3. Determinants of Participation in a Catastrophe Insurance Programme: Empirical Evidence from a Developing Country By Akter, Sonia; Brouwer, Roy; Chowdhury, Saria; Aziz, Salina
  4. Do collateral theories work in social banking ? By Leonardo Becchetti; Melody Garcia
  5. How does geographic distance affect credit market access in Niger ? By Pedrosa, Jose; Do, Quy-Toan

  1. By: Paolo Casini
    Abstract: We analyze the effects of entry in a previously monopolistic microcredit market characterized by asymmetric information and by institutions that offer only one type of contract. We consider different behavioral assumptions concerning the Incumbent and study their influence on equilibrium predictions. We show that competition leads to contract differentiation but can make borrowers worse off. Moreover, the screening process creates a previously unexplored source of rationing. We show that if the incumbent institution is altruistic, rationing is reduced and that this can positively affect the competitor's profit.
    Keywords: Microfinance, Competition, Altruism, Differentiation, Credit Rationing
    JEL: G21 L13 L31 O16
    Date: 2008
  2. By: Elias, Carlos; Alwang, Jeffrey
    Abstract: This paper presents an economic model of group formation with an application to data collected from an agricultural credit program in western Honduras. We formulate a simple theory of group formation using the concept of centers of gravity to explain why individuals join a group. According to our theory, prospective members join based on the potential benefits and costs of group membership, and based on their perception of social distance between themselves and other group members. Social distance is unobservable by outsiders but known by the individual: if you are in then you know who has blue hair. Thus, we argue that social distance helps explain preferences for group formation. To test our theory we analyze data collected from members and non-members of PRODERT, a program that has helped create 188 €܃ajas Rurales€ݠ(CRs). Using conjoint analysis we test for differences in preferences between members and non-members for the main attributes of the CR. We find that members and non-members exhibit similar preferences for the attributes of the CR; therefore non-membership is not related to supply factors. Using information gathered by executing field experiments, we estimate a proxy for social distance. We use this proxy to run a group formation equation and find that it explains, along with individual characteristics, participation in the CR. Finally we offer suggestions on how to balance performance and coverage in programs in which beneficiaries decide who joins. Small cohesive groups may show exceptional performance at the cost of low coverage, and the opposite may be true.
    Keywords: Agricultural Finance, Institutional and Behavioral Economics,
    Date: 2008
  3. By: Akter, Sonia; Brouwer, Roy; Chowdhury, Saria; Aziz, Salina
    Abstract: The paper presents empirical evidence of the determinants of catastrophe insurance participation in one of the poorest and most disaster prone countries in the world. In a large-scale household survey carried out in 2006 we ask 3,000 residents in six different districts in Bangladesh facing various environmental risk exposure levels about their willingness to participate in a catastrophe insurance programme. Combining factors put forward in risk theory and economics, we estimate a model of insurance participation. We show that the household decision to participate in the insurance programme differs depending on both exogenous and endogenous risk exposure levels. As predicted by micro-economic theory, ability to pay, measured in terms of household income and access to credit, significantly affects insurance participation. Furthermore, among the sociodemographic factors investigated in this case study, respondent education and occupation are found to significantly influence household decision making. Our study suggests that low participation rates for catastrophe insurance in a developing country can be explained by high rates of illiteracy and limited access to credit.
    Keywords: Natural disasters, catastrophe, insurance, participation, risk, Bangladesh, Consumer/Household Economics, Environmental Economics and Policy, International Development, Risk and Uncertainty, Q54,
    Date: 2008
  4. By: Leonardo Becchetti (Faculty of Economics, University of Rome "Tor Vergata"); Melody Garcia (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: We study the determinants of collateralisation on the universe of credit files of non individual borrowers in a “Grameen’s type” Bank (Banca Popolare Etica) which aims to reconcile economic sustainability with the pursuit of social goals. The extremely high share of uncollateralized loans (around 42 percent) appears consistent with a multistakeholder (customer oriented) approach which internalises the welfare costs of default of collateralised borrowers. Econometric findings document that collateralisation depends positively on ex ante borrower’s risk (proxyed by non performing past track record) and, negatively, on relationship lending. The incentive effect seems to work since collateralised borrowers are ex ante, but not ex post, riskier.
    Keywords: collateral, bank-firm relationship, credit risk.
    JEL: G21
    Date: 2008–11–07
  5. By: Pedrosa, Jose; Do, Quy-Toan
    Abstract: Distances involved in accessing basic services can constitute a major barrier to development. This paper analyzes the relationship between the distance separating households from microfinance institutions'offices in Niger, and the low levels of development and performance of the microfinance sector in the country. To cope with the effects of geographical distance, microfinance institutions adapt their policies through more restrictive loan conditions, higher interest rates, and more intensive screening. The authors to discuss the tension between access and sustainability in the context of financial services for the poor.
    Date: 2008–11–01

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