nep-mfd New Economics Papers
on Microfinance
Issue of 2012‒01‒03
eight papers chosen by
Olivier Dagnelie
Instituto de Analisis Economico, CSIC

  1. Group lending or individual lending? Evidence from a randomised field experiment in Mongolia By Orazio Attanasio; Britta Augsburg; Ralph de Haas; Emla Fitzsimons; Heike Harmgart
  2. Micro-Savings and Informal Insurance in Villages: How Financial Deepening Affects Safety Nets of the Poor, A Natural Field Experiment By Jeffrey Flory
  3. Participation in Rotating Savings and Credit Associations in Indonesia: New Empirical Evidence on Social Capital By A. Lasagni; E. Lollo
  4. Are households’ poverty levels in Mekong Delta of Vietnam affected by access to credit? By Vuong Quoc, Duy
  5. Credit-constrained in risky activities? The determinants of capital stocks of micro and small firms in Western Africa By Michael Grimm; Simon Lange; Jann Lay
  6. Credit Constraints and Productive Entrepreneurship in Africa By Baliamoune-Lutz, Mina; Brixiova, Zuzana; Ndikumana, Leonce
  7. The role of Islamic finance in enhancing financial inclusion in organization of Islamic cooperation (OIC) countries By Mohieldin, Mahmoud; Iqbal, Zamir; Rostom, Ahmed; Fu, Xiaochen
  8. Does financial structure matter for poverty ? evidence from developing countries By Kpodar, Kangni; Singh, Raju Jan

  1. By: Orazio Attanasio (Institute for Fiscal Studies and University College London); Britta Augsburg (Institute for Fiscal Studies); Ralph de Haas; Emla Fitzsimons (Institute for Fiscal Studies); Heike Harmgart (Institute for Fiscal Studies)
    Abstract: <p>Although microfinance institutions across the world are moving from group lending towards individual lending, this strategic shift is not substantiated by sufficient empirical evidence on the impact of both types of lending on borrowers. We present such evidence from a randomised field experiment in rural Mongolia. We find a positive impact of access to group loans on food consumption and entrepreneurship. Among households that were offered group loans the likelihood of owning an enterprise increases by ten per cent more than in control villages. Enterprise profits increase over time as well, particularly for the less-educated. For individual lending on the other hand, we detect no significant increase in consumption or enterprise ownership. These results are in line with theories that stress the disciplining effect of group lending: joint liability may deter borrowers from using loans for non-investment purposes. Our results on informal transfers are consistent with this hypothesis. Borrowers in group-lending villages are less likely to make informal transfers to families and friends while borrowers in individual-lending villages are more likely to do so. We find no significant difference in repayment rates between the two lending programs, neither of which entailed weekly repayment meetings.</p>
    Keywords: Microcredit; group lending; poverty; access to finance; randomised field experiment
    JEL: G21 D21 I32
    Date: 2011–12
    URL: http://d.repec.org/n?u=RePEc:ifs:ifsewp:11/20&r=mfd
  2. By: Jeffrey Flory (University of Chicago - Becker Center on Chicago Price Theory)
    Abstract: This paper uses a large natural field experiment to identify the effects of formal savings on interhousehold transfers in villages, and the spillover impacts of service-expansion on de facto ineligibles residing in the same community. Despite widespread interest in microfinance, spillover effects on the very poor of expanding formal financial services remain largely unexplored. This study helps fill this gap by examining evidence from an experiment which uses an information intervention that mimics naturally-occurring institutions to increase formal service adoption. It also contributes to an emerging literature on the indirect impacts of policy interventions in developing countries, often evaluated solely on the basis of how they impact direct participants and beneficiaries. In developing regions, households vulnerable to extreme poverty often rely on local safety nets based on transfers from relatives and friends, which help them smooth consumption across food-deficits and household shocks. To date, little is known about how these pre-existing practices are affected as community members begin adopting newly available formal financial services. Using a panel dataset of over 2,000 households collected during a rapid expansion of formal savings services in Central Malawi, this paper shows that experimentally boosting use of formal savings in rural areas sharply increases inter-household transfers during peak periods of hunger. The impact on transfer receipts is strongest among the poorest households, a de facto financial services-ineligible group, among whom the effects are also linked to significant changes in welfare. The strong impacts of formal savings expansion on non service-users suggests that formal finance can have much greater immediate-term effects than would be suggested by focusing exclusively on impacts experienced by service-users. The findings also highlight the sensitivity of traditional safety nets and welfare outcomes among the highly vulnerable in villages to expansion of formal financial markets.
    Keywords: Microfinance; formal savings; indirect effects; safety nets; poverty; food security
    Date: 2011–10
    URL: http://d.repec.org/n?u=RePEc:bfi:wpaper:2011-008&r=mfd
  3. By: A. Lasagni; E. Lollo
    Abstract: Indonesia has a rich historical tradition of mutual cooperation at the community level. This study argues that rotating savings and credit associations (ROSCAs) constitute successful experiences of collective action within the informal financial sector. Therefore, using data from Indonesia Family Life Surveys, it explores the relationship between social capital and ROSCA participation and extends existing models from individual- to community-level determinants. The endowment of social capital at the village level correlates positively with individual ROSCA participation, because community social capital provides individual members with the resources needed to overcome self-selection and foster coordination -two main characteristics of ROSCAs. These results provide new evidence on the role of social capital for fostering collective action and offer new insights about community-driven development.
    Keywords: ROSCAs, informal finance, rotating savings, Indonesia
    JEL: D14 G29 O12 O53
    Date: 2011
    URL: http://d.repec.org/n?u=RePEc:par:dipeco:2011-ep05&r=mfd
  4. By: Vuong Quoc, Duy
    Abstract: This paper investigates the impact of access to formal credit on household poverty in Mekong Delta (MD) – Vietnam. The analysis is based on some indicators of household poverty such as households’ total assets, educational costs, healthcare costs, food consumption, non-farm expenses, off-farm expenses and total income. Based on the given indicators, a comparison is made between borrowers and non-borrowers in a sample of 325 households using the Matching Methods. The findings suggest that the borrowers are better off in education expenditure, healthcare expenses, and total income than those of non-borrowers. The results show that access to formal credit is likely to reduce poverty levels among rural households in Mekong Delta.
    Keywords: Formal credit; propensity score matching; household welfare; individual and group based lending
    JEL: G2 O2 I3 E5
    Date: 2011
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:35412&r=mfd
  5. By: Michael Grimm (International Institute of Social Studies, The Hague); Simon Lange (Georg-August-University Göttingen); Jann Lay (GIGA German Institute of Global and Area Studies, Hamburg)
    Abstract: Micro and small enterprises (MSEs) in developing countries are typically considered to be severely credit constrained. Additionally, high business risks may partly explain why capital stocks of MSEs remain low. This article analyzes the determinants of capital stocks of MSEs in poor economies focusing on credit constraints and risk. The analysis is based on a unique, albeit cross-sectional but backward-looking, micro data set on MSEs covering the economic capitals of seven West-African countries. The main result is that capital market imperfections indeed seem to explain an important part of the variation in capital stocks in the early lifetime of MSEs. Furthermore, the analyses show that risk plays a key role for capital accumulation. Risk-averse individuals seem to adjust their initially low capital stocks upwards when enterprises grow older. MSEs in risky activities owned by wealthy individuals even seem to over-invest when they start their business and adjust capital stocks downwards subsequently. As other firms simultaneously suffer from capital shortages, such behaviour may imply large inefficiencies.
    Keywords: Informal sector; micro and small enterprises; credit constraints; risk; risk aversion; firm growth; West-Africa
    JEL: D13 D61 O12
    Date: 2011–12–21
    URL: http://d.repec.org/n?u=RePEc:got:gotcrc:104&r=mfd
  6. By: Baliamoune-Lutz, Mina (University of North Florida); Brixiova, Zuzana (United Nations Development Programme (UNDP), Swaziland); Ndikumana, Leonce (University of Massachusetts Amherst)
    Abstract: Limited access of entrepreneurs to credit constrains the creation and growth of private firms. In Africa, access to credit is particularly limited for small and medium enterprises (SMEs) due to unclear property rights and the lack of assets that can be used as collateral. This paper presents a model where firm creation and growth hinge on matching potential entrepreneurs with productive technologies, while firm growth depends on acquired capital. The shortage of collateral creates a binding credit constraint on borrowing by SMEs and hence private sector growth and employment, even though the banking sectors have ample liquidity, as is the case in many African countries. The model is tested using a sample of 20 African countries over the period 2005-09. The empirical results suggest that policies aimed at easing the binding credit constraints (e.g., the depth of credit information and the strength of legal rights pertaining to collateral and bankruptcy) would stimulate productive entrepreneurship and private sector employment in Africa.
    Keywords: credit constraints, productive entrepreneurship, employment, policies
    JEL: G21 L26 D24
    Date: 2011–12
    URL: http://d.repec.org/n?u=RePEc:iza:izadps:dp6193&r=mfd
  7. By: Mohieldin, Mahmoud; Iqbal, Zamir; Rostom, Ahmed; Fu, Xiaochen
    Abstract: The core principles of Islam lay great emphasis on social justice, inclusion, and sharing of resources between the haves and the have nots. Islamic finance addresses the issue of"financial inclusion"or"access to finance"from two directions -- one through promoting risk-sharing contracts that provide a viable alternative to conventional debt-based financing, and the other through specific instruments of redistribution of the wealth among the society. Use of risk-sharing financing instruments can offer Shariah-compliant microfinance, financing for small and medium enterprises, and micro-insurance to enhance access to finance. And redistributive instruments such as Zakah, Sadaqat, Waqf, and Qard-al-hassan complement risk-sharing instruments to target the poor sector of society to offer a comprehensive approach to eradicating poverty and to build a healthy and vibrant economy. Instruments offered by Islam have strong historical roots and have been applied throughout history in various Muslim communities. The paper identifies gaps currently existing in Organisation of Islamic Cooperation (OIC) countries on each front, that is, Shariah-compliant micro-finance and financing for small and medium enterprises and the state of traditional redistributive instruments. The paper concludes that Islam offers a rich set of instruments and unconventional approaches, which, if implemented in true spirit, can lead to reduced poverty and inequality in Muslim countries plagued by massive poverty. Therefore, policy makers in Muslim countries who are serious about enhancing access to finance or"financial inclusion"should exploit the potential of Islamic instruments to achieve this goal and focus on improving the regulatory and financial infrastructure to promote an enabling environment.
    Keywords: Access to Finance,Debt Markets,Banks&Banking Reform,Emerging Markets,Islamic Finance
    Date: 2011–12–01
    URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:5920&r=mfd
  8. By: Kpodar, Kangni; Singh, Raju Jan
    Abstract: Although there has been research looking at the relationship between the structure of the financial system and economic growth, much less work has dealt with the importance of bank-based versus market-based financial systems for poverty and income distribution. Empirical evidence has indicated that the structure of the financial system has little relevance for economic growth, suggesting that the same could be true for poverty since growth is an important driver in reducing poverty. Some theories, however, claim that, by reducing information and transaction costs, the development of bank-based financial systems could exert a particularly large impact on the poor. This paper looks at a sample of 47 developing economies from 1984 through 2008. The results suggest that when institutions are weak, bank-based financial systems are better at reducing poverty and, as institutions develop, market-based financial systems can turn out to be beneficial for the poor.
    Keywords: Debt Markets,Banks&Banking Reform,Access to Finance,Economic Theory&Research,Emerging Markets
    Date: 2011–12–01
    URL: http://d.repec.org/n?u=RePEc:wbk:wbrwps:5915&r=mfd

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