nep-mfd New Economics Papers
on Microfinance
Issue of 2011‒04‒23
two papers chosen by
Olivier Dagnelie
Instituto de Analisis Economico, CSIC

  1. Subsidy Uncertainty and Microfinance Mission Drift By Beatriz Armendariz; Bert D'Espallier; Marek Hudon; Ariane Szafarz
  2. Borrowing Constraints and Credit Demand By Jaime Ruiz-Tagle; Francis Vella

  1. By: Beatriz Armendariz; Bert D'Espallier; Marek Hudon; Ariane Szafarz
    Abstract: This paper shines light on subsidy-dependent microfinance institutions (MFIs). Firstly, our model shows that subsidy uncertainty can have pervasive effects on MFIs’ poverty-reduction mission. In particular, we argue that supply-driven uncertainty can lead to mission drift. MFIs maximize utility by serving the poor on the one hand, but must be financially sustainable on the other. Under the fear that subsidies can dry up, MFIs lend to wealthier clients in order to build precautionary savings. In a subsidy-uncertain world this is a rational reaction by MFIs struggling to preserve a pool of poor clients. We show that the incidence of mission drift increases with subsidy uncertainty. Secondly, we test the predictions of the model on original data collected from rating agencies assessment reports on 230 MFIs active in 60 countries over the period 1999-2006. Using both cross-section and panel-data regressions, we estimate the effect of subsidies on poverty reduction as proxied by average loan size, interest rates, and outreach. Our results suggest that more subsidies are associated with smaller loan sizes, but that higher subsidy uncertainty is positively correlated with higher interest rates. We also find that subsidy uncertainty is negatively correlated with outreach.
    Keywords: microfinance; subsidies,; mission drift; poverty reduction; average loan size; interest rate; outreach
    JEL: F35 G21 G28 O54 O57
    Date: 2011–04
  2. By: Jaime Ruiz-Tagle; Francis Vella
    Abstract: This paper investigates the determinants of credit demand in the presence of borrowing constraints for the Chilean economy using a recently collected detailed and innovative data set, the Households Financial Survey. The estimation procedure employed allows for the observed debt to be a function of multiple selection rules and incorporates the endogeneity of income and assets into the debt equation. The paper provides compelling evidence that the relationship between household income and debt, both secured and non secured, is highly non linear. This result has clear implications for the level of household debt in the face of financial deregulation.
    Date: 2010–05

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