nep-mfd New Economics Papers
on Microfinance
Issue of 2009‒10‒24
twelve papers chosen by
Olivier Dagnelie
Instituto de Analisis Economico, CSIC

  1. Banks and microbanks By Cull, Robert; Demirguc-Kunt, Asli; Morduch, Jonathan
  2. Can Microfinance Reduce Economic Insecurity and Poverty? By How Much and How? By Nazrul Islam
  3. Microfinance for Self-Employment Activities in the European Urban Areas: Contrasting Crédal in Belgium and Adie in France By Beatriz Armendariz
  4. Microcredit, labour, and poverty impacts in urban Mexico By Miguel Niño-Zarazúa; Paul Mosley
  5. Savings, Credit, and Insurance: Household Demand for Formal Financial Services in Rural Ghana By Mirko Bendig; Lena Giesbert; Susan Steiner
  6. Assessing the success of microinsurance programmes in meeting the insurance needs of the poor By Paul Mosley
  7. Assessing the insurance role of microsavings By David Hulme; Karen Moore; Armando Barrientos
  8. Microfinance Programmes and the Poor: Whom Are They Reaching? Evidence from Ghana By Joseph Kimos Adjei; Thankom Arun
  9. Targeting the Poor versus Financial Sustainability and External Funding: Evidence of Microfinance Institutions in Ghana By Samuel Kobina Annim
  10. Microfinance and Financial Sector Development By Annabel Vanroose; Bert D’Espallier
  11. The Role of Microfinance in Asset-Building and Poverty Reduction: The Case of Sinapi Aba Trust of Ghana By Joseph Kimos Adjei; Thankom Arun; Farhad Hossain
  12. Formal and informal sectors: Interactions between moneylenders and traditional banks in the rural Indian credit market By Orso, Cristina Elisa

  1. By: Cull, Robert; Demirguc-Kunt, Asli; Morduch, Jonathan
    Abstract: Using two new datasets, the authors examine whether the presence of banks affects the profitability and outreach of microfinance institutions. They find evidence that competition matters. Greater bank penetration in the overall economy is associated with microbanks pushing toward poorer markets, as reflected in smaller average loans sizes and greater outreach to women. The evidence is particularly strong for microbanks relying on commercial funding and using traditional bilateral lending contracts (rather than the group lending methods favored by microfinance nongovernmental organizations). The analysis considers plausible alternative explanations for the correlations, including relationships that run through the nature of the regulatory environment and the structure of the banking environment; but it fails to find strong support for these alternative hypotheses.
    Keywords: Access to Finance,Debt Markets,Banks&Banking Reform,Microfinance,Economic Theory&Research
    Date: 2009–10–01
  2. By: Nazrul Islam
    Abstract: The paper suggests that, rather than through its narrow, direct financial impact, microfinance may prove to be more potent in reducing insecurity and poverty through its indirect, broader impact leading to a more egalitarian initial endowment distribution that is necessary for the "take-off" of an equitable growth process. The paper begins by examining the distinctive roles of micro credit, micro savings, and micro insurance programs in dealing with poverty and insecurity, and highlights the complementariness that exists among these programs and how this complementariness can be used to overcome the weaknesses of the individual programs.
    Keywords: Poverty, Economic insecurity, Micro credit, Micro savings, Micro insurance, Micro finance, Non Government Organizations (NGO)
    JEL: G21 G22 O16 O17
    Date: 2009–10
  3. By: Beatriz Armendariz (CERMi, Centre Emile Bernheim, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and Harvard University, University College London.)
    Abstract: Poverty is multidimensional. In its starkest form, the United Nations Development Annual Reports proxy poverty as combined low levels of income, health, and education. Microfinance, on the other hand, addresses directly the income dimension of poverty, and indirectly health and education. Specifically, microfinance is generally perceived as a tool for poverty reduction via self-employment for income-generating activities. Because the vast majority of poor households live in developing countries, poverty in industrialized countries is often neglected. This report focuses on microfinance as a tool for pulling disadvantaged individuals out of poverty in industrialized countries. In particular, this report contrasts the experience of two microfinance institutions, namely, that of Crédit Alternatif (Crédal) in Belgium with that of the Association pour le droit à l’initiative économique (Adie) in France. While both institutions started over twenty years ago, microfinance is far more active and outreach in per capita terms is much higher in the latter than in the former. First, we find similarities between the two institutions: Both target the socially excluded and unbanked, their presence in the capitals of Belgium and France is strong, both offer “guided” microloans, benefit from government support, and socially responsible investors. Second, we encounter very important differences: The distinct historical roots of Crédal and Adie, their different trajectories in terms of scale and scope, governance, loan size and maturity structures, average interest rates, geographic coverage, and their very different strategies for outreach growth. Third, we draw some lessons from Adie, which can potentially be replicated for microfinance outreach growth by Crédal, and by other microfinance institutions operating in Brussels and Belgium. Finally, this report concludes by extending the analysis to other urban areas of Europe, where strategic alliances with other financial institutions and the government, and marketing for guided loans and other financial products might prove key to microfinance expansion in industrialized countries.
    Keywords: poverty, microfinance, industrialized countries, Europe, social exclusion.
    JEL: F35 G21 G28 O54 O57
    Date: 2009–10
  4. By: Miguel Niño-Zarazúa; Paul Mosley
    Abstract: Improved household accessibility to credit is identified as a significant determinant of intra-household re-allocation of labour resources with important implications for productivity, income, and poverty status. However, credit accessibility could also have wider impacts on poverty if it leads to new hires outside the household. This paper contributes to the existing literature on microcredit in two important ways: first, it investigates the routes through which microcredit reaches those in poverty outside the household. We test whether, by lending to the vulnerable non-poor, microcredit programmes can indirectly benefit poor labourers through increased employment. Second, we conduct the study in the spatial dimension of urban poverty Mexico. This is relevant when considering that, unlike in rural areas, labour often represents the only source of livelihoods to the extreme poor. Our findings point to significant trickle-down effects of microcredit that benefit poor labourers; however, these effects are only observed after loan-supported enterprising households achieve earnings well above the poverty line. The paper concludes with reflections on the policy implications.
    Date: 2009
  5. By: Mirko Bendig; Lena Giesbert; Susan Steiner
    Abstract: This paper argues that the study of the demand for financial services in developing countries leaves out part of the story if it looks at only one of the three elements of the so-called finance trinity—that is, savings products, loans and insurance—as is largely done in the literature. In contrast to previous research, this study assumes that households’ choices for any of these services are strongly interconnected. Therefore, the paper simultaneously estimates the determinants of household demand for savings, loans and insurance by applying a multivariate probit model to household survey data from rural Ghana. On the one hand, the estimation results confirm the common finding that poorer households are less likely to participate in the formal financial sector than better-off households. On the other hand, there is empirical evidence that the use of savings products, loans and insurance depends not only on the socioeconomic status of households, but also on various other factors, such as households’ risk assessment and past exposure to shocks. In addition, trust in the providing institution and its products appear to play a key role.
    Date: 2009
  6. By: Paul Mosley
    Abstract: The paper reviews attempts to provide insurance against risks afflicting the poorest. It presents empirical evidence on the impact of different types of microinsurance, and recommends the idea of ‘quasi-insurance’—the provision of insurance functions through a non-insurance route—where institutional or regulatory constraints prevent insurance proper from being offered. The paper argues that microinsurance so far has been somewhat supply-driven rather than driven by effective demand, especially from the poorest, and thus the insurance products which would benefit the poorest are still at a limited stage of development. Institutional innovations and new insurance products therefore deserve promotion.
    Keywords: microinsurance, microcredit, microsavings, microfinance, risk, insecurity, poverty
    JEL: G21 G22 O16 O17
    Date: 2009–10
  7. By: David Hulme; Karen Moore; Armando Barrientos
    Abstract: The paper contends that more attention should be paid to micro savings in view of multiple ways in which it can help poor to deal with economic insecurity. The paper presents information to show that while microsaving programs have spread, their full potential is far from being realized. It presents a detailed analysis on the basis of data from a selection of micro savings programs to show how savings help the poor to smooth consumption and undertake investment. The paper urges for a strong campaign to popularise micro saving programs.
    Keywords: Economic insecurity, Micro credit, Micro insurance, Micro savings, Micro finance institutions, Poverty
    JEL: G21 O16 O17
    Date: 2009–10
  8. By: Joseph Kimos Adjei; Thankom Arun
    Abstract: A key objective of microfinance programmes is to provide financial services to poor people who are excluded from such services by the formal banking system. It is in this perspective that governments, development partners and donor agencies continue to provide support to such institutions, to enable them to deepen their outreach. This paper examines the type of poor people served by one of the leading microfinance institutions in Ghana. By comparing the living standards of clients of Sinapi Aba Trust (SAT) with those of non-clients, representing the general population in its operational areas, the paper concludes that the microfinance institution reaches disproportionately a smaller percentage of very poor people. The study notes that programme placement plays a key role in determining the type of clients reached by SAT, since almost all its branches are located in urban centres. It finds that the objective of financial sustainability being pursued by SAT has eventually caused it to shift the provision of financial services from very poor households to the less poor.
    Date: 2009
  9. By: Samuel Kobina Annim
    Abstract: The creeping effect of financial crisis and economic turmoil on African economies potentially questions the sustainability of microfinance institutions, in view of the heavy investment received both from development partners and government. This study tests the hypotheses that: (i) interacting own-mobilised funds with formal institutions, microfinance organisations reach less poor clients; and (ii) concentrating on the achievement of financial sustainability causes an institution to target non-poor clients. Using data from Ghana, we revisit the microfinance argument of serving poorer clients on a commercial basis, and control for the effect of source of funds and type of institution. Unlike financial self-sufficiency, operational self-sufficiency appeared to facilitate the reaching of poorer clients. The study upholds sceptics’ view of a trade-off. Categorising institutions based on source of funds, this study adds to knowledge on the future of microfinance. Formal institutions dispensing their own funds appeared to target less poor clients. Using instrumental variable estimation, plausible problems of endogeneity emerging via measurement error were observed. We instrument financial and operational self-sufficiency with density of microfinance institutions in a given location and the group-lending mechanism to resolve attenuation bias. This finding alludes to complementary development strategies and a deliberate harmonisation of microfinance intervention, irrespective of the source of funds.
    Date: 2009
  10. By: Annabel Vanroose (Centre Emile Bernheim, CERMi, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels and Section for Economic, Monetary and Financial Policy, Vrije Universiteit Brussel.); Bert D’Espallier (Lessius Hogeschool Centre Emile Bernheim, CERMi, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels)
    Abstract: This paper analyzes the relationship between performance of microfinance institutions (MFIs) and the development of the formal financial sector of the country in which the MFI is active. We find that MFIs reach more clients and are more profitable where access to the formal financial system is low. This finding is in line with the market-failure hypothesis: MFIs respond to a need that banks do not fulfill and flourish where the formal banking sector fails. However, we also find indications of interdependencies between MFI-performance and formal financial sector development. First, MFIs are less profitable where interest rates are higher reflecting the fact that MFIs depend upon the domestic banking system for additional funding. Secondly, MFIs are less profitable where inflation is high, suggesting that MFIs benefit from stability of the formal financial system. Overall, the results show that the macro-economic environment is crucial to fully understand MFI-performance and that outreach and accordingly impact of MFIs are contingent on financial sector development.
    Keywords: O16, O50, G21
    Date: 2009–09
  11. By: Joseph Kimos Adjei; Thankom Arun; Farhad Hossain
    Abstract: The paper evaluates the extent to which Sinapi Aba Trust has contributed to poverty reduction among rural and urban poor especially women by supporting them with small loans to expand their businesses to generate income to build up their asset base. Using a cross-sectional data from 547 respondents, the study found that participation in the programme has enabled established clients to own savings deposits and subscribe to a client welfare scheme which serves as insurance to pay off debts in times of illness or death. Established clients were also found to be in a better position to contribute towards the education of their children and payment of healthcare for members of their households as well as contribution towards the purchase of household durables. The study noted that programmes that are financially sustainable have greater effects on participants, and that there is the need for clients’ graduation to benefit most from participation in such programmes.
    Date: 2009
  12. By: Orso, Cristina Elisa
    Abstract: This paper describes, through a theoretical approach, the interactions between institutional lenders and local moneylenders, and how these affect the rural credit market. It evaluates the effects produced by the introduction of "spillovers" in a rural credit market with rationing in which banks and moneylenders interact simultaneously while working in distinct segments. Due to the strong and consolidated social ties, it is probable that the spread of knowledge concerning potential debtors comes about in targeted and rapid way with reduced costs for the lenders as well.
    JEL: G21 O17 O19
    Date: 2009–10

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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