nep-mfd New Economics Papers
on Microfinance
Issue of 2009‒08‒16
five papers chosen by
Olivier Dagnelie
Instituto de Analisis Economico, CSIC

  1. Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila By Jonathan Zinman; Dean Karlan
  2. Credit constraints and investment behavior in Mexico's rural economy By Love, Inessa; Sanchez, Susana M.
  3. The Bottom of the Pyramid Strategy for Reducing Poverty: A Failed Promise By Aneel Karnani
  4. Screening in New Credit Markets: Can Individual Lenders Infer Borrower Creditworthiness in Peer-to-Peer Lending? By Rajkamal Iyer; Asim Ijaz Khwaja; Erzo F.P. Luttmer; Kelly Shue
  5. Village Development Boards (VDBs) in Nagaland By Karmakar K G

  1. By: Jonathan Zinman (Dartmouth College & Innovations for Poverty Action); Dean Karlan (Economic Growth Center, Yale University, Innovations for Poverty Action, MIT Jameel Poverty Action Lab)
    Abstract: Microcredit seeks to promote business growth and improve well-being by expanding access to credit. We use a field experiment and follow-up survey to measure impacts of a credit expansion for microentrepreneurs in Manila. The effects are diffuse, heterogeneous, and surprising. Although there is some evidence that profits increase, the mechanism seems to be that businesses shrink by shedding unproductive workers. Overall, borrowing households substitute away from labor (in both family and outside businesses), and into education. We also find substitution away from formal insurance, along with increases in access to informal risk-sharing mechanisms. Our treatment effects are stronger for groups that are not typically targeted by microlenders: male and higher-income entrepreneurs. In all, our results suggest that microcredit works broadly through risk management and investment at the household level, rather than directly through the targeted businesses.
    Keywords: microfinance, microcredit, microentreprenuership, risk sharing, formal and informal finance
    JEL: O1 D1 D2 G2
    Date: 2009–07
  2. By: Love, Inessa; Sanchez, Susana M.
    Abstract: This paper uses two recently completed surveys of individual entrepreneurs (farmers and microentrepreneurs) and registered enterprises (agricultural and nonagricultural) operating in Mexico’s rural sector to provide new evidence about the factors influencing the incidence of credit constraints and investment behavior. To measure the incidence of credit constraints, the authors use self-reported information on whether economic agents have a demand for loans, separating formal and informal markets. They define credit constraints as a situation where rural agents report an unsatisfied demand for loans (formal or informal), which originates from rural agents having projects that are too risky or from impediments hindering the ability of rural agents and lenders to reduce information asymmetries. The authors find that the self-reported demand for loans is low. Nevertheless, the incidence of credit constraints is pervasive, especially among individual entrepreneurs. The low use of loans has consequences for the amount of investments that occur in the rural economy, posing a major obstacle to Mexico’s convergence towards its NAFTA partners. The empirical analysis, which includes proxies of business prospects and creditworthiness, shows that improving the availability of loans to credit constrained agents would increase the number of agents making investments and their investment to capital ratios.
    Keywords: Access to Finance,,Debt Markets,Bankruptcy and Resolution of Financial Distress,Banks&Banking Reform
    Date: 2009–08–01
  3. By: Aneel Karnani
    Abstract: The movement emphasizing free markets to reduce poverty has found strong expression in the ‘bottom of the pyramid’ approach in recent years. It views the poor as “resilient and creative entrepreneurs and value-conscious consumers”. This romanticized view of the poor harms the poor in two ways. First, it results in too little emphasis on legal, regulatory and social mechanisms to protect the poor who are vulnerable consumers. Second, it overemphasizes microcredit and underemphasizes fostering modern enterprises that would provide employment opportunities for the poor. More importantly, it grossly underemphasizes the critical role and responsibility of the state in poverty reduction.
    Keywords: Poverty reduction; bottom of pyramid; consumption choices; micro-entrepreneurs
    JEL: O10 I30
    Date: 2009–08
  4. By: Rajkamal Iyer; Asim Ijaz Khwaja; Erzo F.P. Luttmer; Kelly Shue
    Abstract: The current banking crisis highlights the challenges faced in the traditional lending model, particularly in terms of screening smaller borrowers. The recent growth in online peer-to-peer lending marketplaces offers opportunities to examine different lending models that rely on screening by multiple peers. While these market-based, non-hierarchical structures potentially offer screening advantages, especially in utilizing soft information, individual lenders likely lack financial expertise and lending experience. This paper evaluates whether lenders in such peer-to-peer markets are able to use borrower information to infer creditworthiness. We examine this ability in one such online market using a methodology that takes advantage of lenders not observing a borrower’s true credit score but only seeing an aggregate credit category. We find that lenders are able to use available information to infer a third of the variation in creditworthiness that is captured by a borrower’s credit score. This inference is economically significant and allows lenders to lend at a 140-basis-points lower rate for borrowers with (unobserved to lenders) better credit scores within a credit category. While lenders infer the most from standard banking “hard†information, they also use non-standard (subjective) information. Our methodology shows, without needing to code information contained in the pictures or personal descriptions posted by borrowers, that lenders learn even from such “softer†information, particularly when it is likely to provide credible signals regarding borrower creditworthiness. Our findings highlight the screening ability of peer-to-peer markets and suggest that these emerging markets may provide a viable complement to traditional lending markets, especially for smaller borrowers.
    JEL: D53 D8 G21 L81
    Date: 2009–08
  5. By: Karmakar K G
    Abstract: The article describes the constitution and functions of Village Development Boards (VDBs) in NAGALAND where VDBs are considered as “Financial Intermediaries” or “Non-Banking Financial Intermediaries”. They are integrating the ever important credit mechanism in the rural areas for fostering the economic development process.
    Keywords: village Development, Boards, VDBs, financial intermediaries, non-Banking, financial internediaries, rural areas, economic development, constitution, functions, Nagaland, literacy ratio, Governance Systems, Indian Constitution, resources, Micro-Financing Activities, Constitution,
    Date: 2009

This nep-mfd issue is ©2009 by 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.
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