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on Microfinance |
| By: | Mallick, Debdulal |
| Abstract: | The linkage between the formal and informal credit markets has long been of great interest to development economists. This paper addresses one important aspect of the linkage by empirically investigating the impact of the microfinance program expansion on the moneylender interest rates in Bangladesh, and finds that moneylender interest rates increase with microfinance program expansion. MFI program expansion increases moneylender interest rates in the villages in which more loans are invested in productive economic activities than consumption. Borrowers resort to moneylenders for additional funds because of inadequate supply, unavailability of seasonal working capital from MFIs, and tight repayment schedule, which in turn increases demand for moneylender loans. |
| Keywords: | Moneylender; microfinance; interest rate; informal sector. |
| JEL: | O17 C31 O12 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17800&r=mfd |
| By: | Galarza, Francisco |
| Abstract: | This paper reports the results of behavioral economic experiments conducted in Peru to examine the relationship amongst risk preferences, loan take-up, and insurance purchase decisions. This area-based yield insurance can help reduce people's vulnerability to large scale covariate shocks, and can also lower the loan default probability under extreme negative covariate shocks. In a context of collateralized formal credit markets, we provide suggestive evidence that insurance may help reduce the fear of losing collateral that prevents potential borrowers from taking loans. Framing these experiments to recreate a real life situation, we started with a Baseline Game where subjects had to choose between a fallback production project and an uninsured loan.We then introduced a third project choice--loan with yield insurance (Insurance Game)--which allows us to measure the effect of introducing insurance on the demand for loans. Overall, more than 50 percent of the subjects are willing to buy insurance in this insurance game. Further, controling for choices made in the baseline game, covariate shocks experienced earlier, and previous rounds' winnings, we find that the decision to take the insured loan (uninsured loan) rather than any of the other two projects is predicted by wealth and lower (higher) levels of risk aversion. Interestingly, this relationship with risk aversion continues to hold when we control for the overweighting of low-probability events observed in the data. |
| Keywords: | area-yield insurance; credit; covariate risk; idiosyncratic risk; risk aversion; probability weighting; experimental economics; Peru |
| JEL: | D81 C93 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17833&r=mfd |
| By: | Francesco Columba; Leonardo Gambacorta; Paolo Emilio Mistrulli |
| Abstract: | A large body of literature has shown that small firms experience difficulties in accessing the credit market due to informational asymmetries. Banks can overcome these asymmetries through relationship lending, or at least mitigate their effects by asking for collateral. Small firms, especially if they are young, have little collateral and short credit histories, and thus may find it difficult to raise funds from banks. In this paper, we show that even in this case, small firms may improve their borrowing capacity by joining mutual guarantee institutions (MGIs). Our empirical analysis shows that small firms affiliated with MGIs pay less for credit compared with similar firms which are not MGI members. We obtain this result for interest rates charged on loan contracts which are not backed by mutual guarantees. We then argue that our findings are consistent with the view that MGIs are better than banks at screening and monitoring opaque borrowers. Thus, banks benefit from the willingness of MGIs to post collateral since it implies that firms are better screened and monitored. |
| Keywords: | credit guarantee schemes, joint liability, microfinance, peer monitoring, small business finance |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:290&r=mfd |