New Economics Papers
on Microfinance
Issue of 2012‒11‒11
eight papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Social Capital and Repayment Performance of Group Lending in Microfinance By Luminita Postelnicu
  2. The Outreach and Sustainability of Microfinance: Is There a Tradeoff? By Bengtsson, Niklas; Pettersson, Jan
  3. Determinants of Margin in Microfinance Institutions By Beatriz Cuéllar Fernández; Yolanda Fuertes-Callén; Carlos Serrano-Cinca; Begoña Gutiérrez-Nieto
  4. Do Subsidies Enhance or Erode the Cost Efficiency of Microfinance? Evidence from MFI Worldwide Micro Data By Mieno, Fumiharu; Kai, Hisako
  5. Uganda's microfinance policy regime: An exploratio through a political-economy framework By Schmidt, Oliver
  6. Bank strategies in catastrophe settings: empirical evidence and policy suggestions. By Becchetti, Leonardo; Castriota, Stefano; Conzo, Pierluigi
  7. Nature and Dimensions of Farmers’ Indebtedness in India By Rajeev, Meenakshi; Vani , B P; Bhattacharjee, Manojit
  8. The Unequal Effects of Financial Development on Firms' Growth in India By Maria Bas; Antoine Berthou

  1. By: Luminita Postelnicu
    Abstract: Conventional wisdom associates the success of microfinance group lending with joint liability only. Recent studies have pinpointed the role of social capital, around which the successful implementation of joint liability contracts seems to revolve. This paper brings together all relevant evidence on the effect of social capital on the repayment performance of microfinance group lending. I reconcile seemingly divergent views on the role of social capital by pointing out that authors measure different aspects of social capital. In particular, researchers use different proxies and different methodologies to measure social capital. I emphasize the need for a theoretical framework designed to fit social capital in the microfinance context, and I suggest avenues for future research in this field.
    Keywords: social capital; social ties; loan repayment performance; group lending
    JEL: Z13 G21 O12 O17 D71
    Date: 2012–10–30
  2. By: Bengtsson, Niklas (Uppsala Center for Labor Studies); Pettersson, Jan (Swedish Ministry of Finance)
    Abstract: Both practitioners and academics posit that microfinance organizations face a tradeoff between financial performance and outreach. We designed a randomized controlled trial of a transitory interest rate subsidy to investigate this tradeoff. We find that subsidized credit substantially increases demand, although a non-trivial fraction of members abstain from borrowing even when credit is virtually free. Among those who borrow, we find no effect on default rates. Whereas the intervention is initially unpro table due to lost interest rate revenues, profits eventually catch up because subsidized clients are more likely to apply for new loans (with interest) after the subsidy is lifted. In addition, because loan-taking clients more often deposit savings in the bank, the subsidy decreases the bank's dependence on external funding. We conclude that transitory interest rate subsidies that are unpro table in the short run may improve outreach without undermining sustainability in the long run. However, outreach ultimately appears constrained by low returns to capital and weak market integration among the poor.
    Keywords: Microfinanance; Collateral; Demand for credit; Interest rate changes; Experimental methods; Randomized controlled trial; RTC
    JEL: C93 O12 O16
    Date: 2012–10–30
  3. By: Beatriz Cuéllar Fernández; Yolanda Fuertes-Callén; Carlos Serrano-Cinca; Begoña Gutiérrez-Nieto
    Abstract: Microfinance institutions (MFIs) lend to the poor, fostering these individuals’ financial inclusion. However, microfinance clients suffer from high interest rates, a type of poverty penalty. Reducing margins and lowering interest rates should be a target for MFIs with a strong social commitment. This paper analyzes the determinants of margin in MFIs. A banking model has been adapted to the case of MFIs. This model has been empirically tested using 9-year panel data. Some factors explaining bank margin also explain MFI margin, with operating expenses being the most important factor. Specific microfinance factors are donations and legal status, as regulated MFIs can collect deposits. It has also been found that MFIs operating in countries with a high level of financial inclusion have low margins.
    Keywords: Microfinance institutions; banking; net interest income; outreach; financial inclusion
    JEL: G21 C23 R51
    Date: 2012–10–30
  4. By: Mieno, Fumiharu; Kai, Hisako
    Abstract: A recent issue in the microfinance literature is whether microfinance institutions (MFIs) are financially sustainable without a subsidy as a prerequisite for competition policy or commercialization processes. Although some recent studies have proposed relevant theoretical frameworks, empirical analyses are scarce. Using financial data for MFIs across a panel of 1791 observations for 2003-2006, we estimate a cost function for the MFIs and a measure of inefficiency using the stochastic frontier cost approach, and then examine the effects of subsidies, operating age and other possible factors as determinants of efficiency., We find that subsidies are generally not an impediment to cost efficiency; instead, they are generally utilized to improve cost efficiency. We also find that the effect of a subsidy on efficiency is larger for younger MFIs, suggesting that subsidies for these institutions are effectively utilized for intensifying initial technology investment or human resource development. The findings are consistent with the arguments that stress the importance of subsidies for the initial stage of development of MFIs, and partially contradictory to the claims that the subsidies generally erode MFIs’ financial sustainability.
    Keywords: microfinance, financial institutions, frontier cost function approach
    JEL: G21 O16 R51
    Date: 2012–03
  5. By: Schmidt, Oliver
    Abstract: In 2005, Uganda’ government fundamentally shifted the direction of its microfinance (MF) policy. Hitherto it had focused on integrating MF institutions into the financial sector, allowing them to take deposits. Since 2005, it focuses on savings and credit cooperatives (SACCOs); with government funding of and ostensibly interfering in the SACCOs’ operations. This paper explores the reversal of policy direction, drawing on public choice theory. It finds that the shift of policy direction served the objectives of Uganda’s politicians to maintain political power, as it offered them an avenue to create loyalty through patronage. MF special interest groups – particularly development agencies – had chosen a strategy based on information and financial contributions that failed to incite politicians and to maintain univocal support from technocrats and MF practitioners.
    Keywords: Political Economics; Microfinance; Policy; Uganda; Regulation; Policy Making; Economic Develoopment
    JEL: O55 D02 O16 D78
    Date: 2012–10
  6. By: Becchetti, Leonardo (Associazione Italiana per la Cultura della Cooperazione e del Non Profit); Castriota, Stefano (Associazione Italiana per la Cultura della Cooperazione e del Non Profit); Conzo, Pierluigi (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)
    Abstract: The poor in developing countries are the most exposed to natural catastrophes and microfinance organizations may potentially ease their economic recovery. Yet, no evidence on MFIs strategies after natural disasters exists. We aim to fill this gap with a database which merges bank records of loans, issued before and after the 2004 Tsunami by a Sri Lankan MFI recapitalized by Western donors, with detailed survey data on the corresponding borrowers. Evidence of effective post-calamity intervention is supported since the defaults in the post-Tsunami years (2004-2006) do not imply smaller loans in the period following the recovery (2007-2011) while Tsunami damages increase their size. Furthermore, a cross-subsidization mechanism is in place: clients with a long successful credit history (and also those not damaged by the calamity) pay higher interest rates. All these features helped damaged people to recover and repay both new and previous loans. However, we also document an abnormal and significant increase in default rates of non victims suggesting the existence of contagion and/or strategic default problems. For this reason we suggest reconversion of donor aid into financial support to compulsory microinsurance schemes for borrowers.
    Keywords: Tsunami; disaster recovery; microfinance; strategic default; contagion; microinsurance.
    JEL: G21 G32 G33
    Date: 2012–09–28
  7. By: Rajeev, Meenakshi; Vani , B P; Bhattacharjee, Manojit
    Abstract: This paper examines nature and extent of farmers’ indebtedness in India using unit record data from NSSO 59th round, and provided a comparative picture of major Indian states. It shows using data from rice cultivating farmers that productivity of small farmers is not only higher than the medium farmers, it increases with access to credit. In terms of access to credit, seen through extent of indebtedness, Karnataka is better placed than many Indian states. But Andhra Pradesh, Tamil Nadu, Punjab and Kerala lie ahead of Karnataka. Ironically however, almost half of the credit is still provided by the informal sector in the state of Karnataka (on an average). Region wise picture shows that Southern region is more dependent on informal sources of credit. Poor farmers with lower land holdings are much more deprived of the formal sources of credit than the comparatively richer ones. Thus they also pay a much higher rate of interest with modal value of 36%. But it is heartening to note that loans are taken mostly for income generating purposes. It also indirectly implies that even for the income generating purposes poor are not getting access to formal sources of credit.
    Keywords: Incidence of indebtedness; productivity analysis; formal sector credit; indebted households
    JEL: A10 C80
    Date: 2012–10–31
  8. By: Maria Bas; Antoine Berthou
    Abstract: This paper investigates the microeconomic effects of financial development on economic growth. The increased availability of credit is usually expected to improve firms’ growth due to the elimination of credit constraints. We investigate this question using a survey of Indian firms in the manufacturing industry during the period 1997-2006, in a context of rapid economic growth and underlying structural changes. We examine how changes in the level credit over GDP in Indian States affected firms’ value added and capital used for production. The baseline estimations show that financial development has boosted within-firm growth in India. Our findings also suggest that the impact of financial development on firms’ growth is heterogeneous across firms and industries. Credit expansion has a greater effect on firms that are initially larger, more productive or profitable. The effect of financial development is less heterogenous in sectors relying on external finance, where both medium-size and large firms have expanded more rapidly than small firms. These results are robust to various specifications that allow to control for other reforms taking place simultaneously, or for potential reverse causality.
    Keywords: financial development;banking reforms;firm panel data;firm growth and capital investments
    JEL: O16 G21
    Date: 2012–10

This issue is ©2012 by Aastha Pudasainee and 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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