New Economics Papers
on Microfinance
Issue of 2013‒02‒03
nine papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Does access to finance matter in microenterprise growth ? evidence from Bangladesh By Khandker, Shahidur R.; Samad, Hussain A.; Ali, Rubaba
  2. Green Microfinance. Characteristics of microfinance institutions involved in environmental management By Marion Allet; Marek Hudon
  3. Micro-finance Competition: Motivated Micro-lenders, Double-dipping and Default By Brishti Guha; Prabal Roy Chowdhury
  4. Microfinance and the Decline of Poverty: Evidence from the Nineteenth-Century Netherlands By Heidi Deneweth; Oscar Gelderblom; Joost Jonker
  5. Failure vs. Displacement: Why An Innovative Anti-Poverty Program Showed No Net Impact By Morduch, Jonathan; Ravi, Shamika; Bauchet, Jonathan
  6. Poverty and Self-Control By B. Douglas Bernheim; Debraj Ray; Sevin Yeltekin
  7. Interaction of Formal and Informal Financial Markets in Quasi-Emerging Market Economies By Harold Ngalawa; Nicola Viegi
  8. Financial exclusion and the cost of incomplete participation By Botti, Fabrizio; Bollino, Carlo Andrea
  9. Who Benefits from Financial Development? New Methods, New Evidence By : Daniel J. Henderson; Chris Papageorgiou; Christopher F. Parmeter

  1. By: Khandker, Shahidur R.; Samad, Hussain A.; Ali, Rubaba
    Abstract: In less-developed economies such as Bangladesh, the farm sector is the major source of employment and income, while the rural nonfarm sector provides as an additional source of income. But the rural nonfarm sector increasingly plays an important role in fostering the development of the rural economy. A significant share of this sector is made up of microenterprise activities, which requires investment and access to adequate funds. This paper investigates the role access to finance plays in promoting the efficiency and growth of microenterprise activities. The findings suggest that households engaged in microenterprise activities, in addition to farm and other nonfarm activities, are much better off (in terms of income, expenditure and poverty) than those not engaged in such activities. Fewer than 10 percent of the enterprises have access to institutional finance (formal banks or microcredit), although the rate of return on microenterprise investments is more than sufficient (36 percent per year) to repay institutional loans. The research suggests that credit constraints may reduce the enterprises'profit margin by as much as 13.6 percent per year. As the returns to microenterprise investment are found to be high, microfinance institutions can play a larger role in supporting microenterprise growth in Bangladesh.
    Keywords: Access to Finance,Debt Markets,Investment and Investment Climate,Banks&Banking Reform,Economic Theory&Research
    Date: 2013–01–01
  2. By: Marion Allet; Marek Hudon
    Abstract: In recent years, development practice has seen that microfinance institutions (MFIs), beyond their financial and social objectives, start considering their environmental bottom line. Yet, little is known on the characteristics of institutions involved in environmental management. For the first time, this paper empirically identifies the characteristics of these ‘green’ MFIs on a sample of 160 microfinance institutions worldwide. Basing our analysis on various econometric tests, we find that larger MFIs and MFIs registered as banks tend to perform better in environmental policy and environmental risk assessment. Furthermore, more mature MFIs tend to have a better environmental performance, in particular in the provision of green microcredit and environmental non-financial services. On the other hand, financial performance is not significantly related to environmental performance, suggesting that ‘green’ MFIs are not more or less profitable than other microfinance institutions.
    Keywords: Microfinance; Environment; Microcredit; Corporate Social Responsibility; Size; Financial Performance
    JEL: G21 D20 Q01 Q56
    Date: 2013–01–25
  3. By: Brishti Guha (Department of Economics, Singapore Management University, 90 Stamford Road, Singapore 178903); Prabal Roy Chowdhury
    Abstract: We develop a tractable model of competition among socially motivated MFIs, so that the objective functions of the MFIs put some weight on their own clients' utility. We nd that the equilibrium involves double-dipping, i.e. borrowers taking multiple loans from different MFIs, whenever the MFIs are relatively profit-oriented. Further, double-dipping necessarily leads to default and inefficiency, and moreover, borrowers who double-dip face relatively higher transactions costs and are actually worse off compared to those who do not. Interestingly, an increase in MFI competition can increase the extent of doubledipping and default. Further, the interest rates may go either way, with the interest rate likely to increase if the MFIs are very socially motivated.
    Keywords: Micro-finance competition, motivated MFIs, double-dipping, default, subsidized credit, interest cap.
    JEL: C72 D40 D82 G21
    Date: 2013–01
  4. By: Heidi Deneweth; Oscar Gelderblom; Joost Jonker
    Abstract: Building on recent work by Collins et al. this paper aims to explain the failure of corporate and public initiatives to alleviate poverty before the twentieth century by unravelling the financial rationale behind the various combinations of private efforts, family and neighbourhood help, financial intermediation, and government intervention tried by poor households in the eighteenth and nineteenth century. There existed several financial institutions whose functioning was very similar to modern microfinance institutions, yet none of them were in a position to help the poor. We find that in the Netherlands the boundary of formal financial markets moved down not because of financial innovation, but because of economic growth pushing up wages. Until the last quarter of the 19th-century poor households simply lacked the money to use newly established mutual insurances, savings- and loan banks.
    Keywords: microfinance, poverty, cash flow management, 19th century, Netherlands
    Date: 2013–02
  5. By: Morduch, Jonathan; Ravi, Shamika; Bauchet, Jonathan
    Abstract: We present results from a randomized trial of an innovative anti-poverty program in India. Instead of a safety net, the program provides “ultra-poor” households with inputs to create a new livelihood and attain economic independence. We find no statistically significant evidence of lasting net impact on consumption, income or asset accumulation. The main impact was the re-optimization of time use: sharp gains in income from the new livelihood were fully offset by lower earnings from wage labor. The result highlights how the existence of alternative economic options shapes net impacts and external validity.
    JEL: O1 D1 J2 J4
    Date: 2012–12
  6. By: B. Douglas Bernheim; Debraj Ray; Sevin Yeltekin
    Abstract: The absence of self-control is often viewed as an important correlate of persistent poverty. Using a standard intertemporal allocation problem with credit constraints faced by an individual with quasi- hyperbolic preferences, we argue that poverty damages the ability to exercise self-control. Our theory invokes George Ainslie’s notion of “personal rules,” interpreted as subgame-perfect equilibria of an intrapersonal game played by a time-inconsistent decision maker. Our main result pertains to situations in which the individual is neither so patient that accumulation is possible from every asset level, nor so impatient that decumulation is unavoidable from every asset level. Such cases always possess a threshold level of assets above which personal rules support unbounded accumulation, and a second threshold below which there is a “poverty trap”: no personal rule permits the individual to avoid depleting all liquid wealth. In short, poverty perpetuates itself by undermining the ability to exercise self-control. Thus even temporary policies designed to help the poor accumulate assets may be highly effective. We also explore the implications for saving with easier access to credit, the demand for commitment devices, the design of accounts to promote saving, and the variation of the marginal propensity to consume across classes of resource claims.
    JEL: C61 C63 D31 D91 H31 I3 O12
    Date: 2013–01
  7. By: Harold Ngalawa (School of Economics and Finance, University of KwaZulu-Natal); Nicola Viegi (Department of Economics, University of Pretoria)
    Abstract: The primary objective of this paper is to investigate the interaction of formal and informal financial markets and their impact on economic activity in quasi-emerging market economies. Using a four-sector dynamic stochastic general equilibrium model with asymmetric information in the formal financial sector, we come up with three fundamental findings. First, we demonstrate that formal and informal financial sector loans are complementary in the aggregate, suggesting that an increase in the use of formal financial sector credit creates additional productive capacity that requires more informal financial sector credit to maintain equilibrium. Second, it is shown that interest rates in the formal and informal financial sectors do not always change together in the same direction. We demonstrate that in some instances, interest rates in the two sectors change in diametrically opposed directions with the implication that the informal financial sector may frustrate monetary policy, the extent of which depends on the size of the informal financial sector. Thus, the larger the size of the informal financial sector the lower the likely impact of monetary policy on economic activity. Third, the model shows that the risk factor (probability of success) for both high and low risk borrowers plays an important role in determining the magnitude by which macroeconomic indicators respond to shocks.
    Keywords: Informal financial sector, formal financial sector, monetary policy, general equilibrium
    JEL: E44 E47 E52 E58
    Date: 2013–01
  8. By: Botti, Fabrizio; Bollino, Carlo Andrea
    Abstract: Economic and social implications of the access to financial services both in developed and in developing countries have increasingly promoted the debate around the issue of considering “financial inclusion” as a public good, according to potential positive externalities associated to greater financial participation. If the role of financial inclusion as a public good, and the enhanced efficiency of public policy following a greater participation in the financial markets are established in an abstract way, a numerical estimate of the potential costs of incomplete participation in the financial system is still not explicitly addressed in the literature. The study designs a simplified approach for the calculation of the cost of financial exclusion through the identification of a general functional form representing the cost of incomplete participation encountered by financial actors or by the public policy aimed at alleviating financial exclusion. Such a cost is estimated parametrically according to alternative subgroups of financial institutions with different levels of depth of outreach corresponding to distinct orientation toward individuals excluded from the mainstream financial sector. Calculations show the role of financial exclusion in generating inefficiencies that raise the cost of accessing to financial transactions for all the participating individuals, or, in a policy perspective, the cost to tackle incomplete participation.
    Keywords: Financial inclusion; financial exclusion; microfinance
    JEL: G21
    Date: 2012–12
  9. By: : Daniel J. Henderson (Department of Economics, Finance and Legal Studies, University of Alabama); Chris Papageorgiou (Strategy, Policy and Review Department, International Monetary Fund, Washington, DC); Christopher F. Parmeter (Department of Economics, University of Miami)
    Abstract: This paper takes a fresh look at the impact of financial development on economic growth by using recently developed kernel methods that allow for heterogeneity in partial effects, nonlinearities, and endogenous regressors. Our results suggest that while the positive impact of financial development on growth has increased over time, it is also highly nonlinear with more developed nations benefiting while low-income countries do not benefit at all. We also conduct a novel policy analysis that confirms these statistical findings. In sum, this set of results contributes to the ongoing policy debate as to whether low-income nations should scale up financial reforms.
    Keywords: Country heterogeneity, financial development, growth, nonlinearities, nonparametric regression, irrelevant variables
    JEL: C14 O16 O47
    Date: 2012–10–15

This issue is ©2013 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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