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on Microfinance |
| By: | Manuela Angelucci; Dean Karlan; Jonathan Zinman |
| Abstract: | Theory and evidence have raised concerns that microcredit does more harm than good, particularly when offered at high interest rates. We use a clustered randomized trial, and household surveys of eligible borrowers and their businesses, to estimate impacts from an expansion of group lending at 110% APR by the largest microlender in Mexico. Average effects on a rich set of outcomes measured 18-34 months post-expansion suggest some good and little harm. Other estimators identify heterogeneous treatment effects and effects on outcome distributions, but again yield little support for the hypothesis that microcredit causes harm. |
| JEL: | D12 D22 G21 O17 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19119&r=mfd |
| By: | Dean Karlan; Jonathan Zinman |
| Abstract: | The long-run price elasticity of demand for credit is a key parameter for intertemporal modeling, policy levers, and lending practice. We use randomized interest rates, offered across 80 regions by Mexico’s largest microlender, to identify a 29-month dollars-borrowed elasticity of -1.9. This elasticity increases from -1.1 in year one to -2.9 in year three. The number of borrowers is also elastic. Credit bureau data does not show evidence of crowd-out. Competitors do not respond by reducing rates, perhaps because Compartamos’ profits are unchanged. The results are consistent with multiple equilibria in loan pricing. |
| JEL: | E43 G21 O11 O12 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19106&r=mfd |
| By: | Alexander Karaivanov (Simon Fraser University); Anke Kessler (Simon Fraser University) |
| Abstract: | We develop a model to study the choice between formal and informal sources of credit in a setting with strategic default due to limited enforcement. Informal loans (e.g., from friends or relatives) are enforced by the threat of both parties losing the friendship relation. In contrast, formal loans (e.g., from banks) can only be enforced via collateral requirement. We show that the optimal informal loan contract features zero interest rate and zero physical collateral requirement. In contrast, formal loans always charge positive interest and require collateral. Borrowers are more likely to choose informal loans for small investment needs, and for loans with no or low default risk. Riskier loans, up to a limit, are optimally taken from formal sources since physical collateral, unlike social collateral is divisible, and defaulting with a bank is thus less costly than defaulting with a friend. Very risky loans, in contrast, can only be financed by informal sources due to insufficient collateral. Because default with social capital is relatively costly, however, personal loans also imply a limited growth potential. Empirical results from a cross section of 2880 Thai households are consistent with the predicted pattern of formal versus informal credit. |
| Keywords: | Informal credit, family loans, social capital, peer-to-peer lending, microfinance. |
| JEL: | G21 O12 O16 O17 D19 D64 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:sfu:sfudps:dp13-03&r=mfd |
| By: | Simon Cornée (CREM CNRS UMR 6211, University of Rennes 1 and CERMi); David Masclet (CREM CNRS UMR 6211, University of Rennes 1 and CIRANO (Montreal)) |
| Abstract: | Microfinance is generally associated with high repayment rates. However, it is not clear whether the success of microfinance results only from the use of group lending or is also due to other mechanisms such as peer sanctioning or dynamic incentives induced by long-term relationships that are typically included in microfinance contracts. In this paper, we contribute to the existing literature by investigating the respective effects of each of these components of microfinance. This is done by running a laboratory experiment that allows us to isolate long-term relationships from the two other components (i.e. group lending and peer monitoring). Our experiment indicates that peer-lending dimension of microcredit in absence of peer-sanctioning mechanism is not sufficient to mitigate ex ante and ex post moral hazards. In sharp contrast, we find that individualized long-term credit relationships perform significantly better than group-lending mechanisms with or without peer sanctioning. |
| Keywords: | Experimental Economics, Credit Market, Microfinance, Peer Lending |
| JEL: | C72 C91 G20 G21 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201316&r=mfd |
| By: | Iyer, Rajkamal (MIT); Khwaja, Asim Ijaz (Harvard University); Luttmer, Erzo F. P. (Dartmouth University); Shue, Kelly (University of Chicago) |
| Abstract: | The recent banking crisis highlights the challenges faced in credit intermediation. New online peer-to-peer lending markets offer opportunities to examine lending models that primarily cater to small borrowers and that generate more types of information on which to screen. This paper evaluates screening in a peer-to-peer market where lenders observe both standard financial information and soft, or nonstandard, information about borrower quality. Our methodology takes advantage of the fact that while lenders do not observe a borrower's exact credit score, we do. We find that lenders are able to predict default with 45% greater accuracy than what is achievable based on just the borrower's credit score, the traditional measure of creditworthiness used by banks. We further find that lenders effectively use nonstandard or soft information and that such information is relatively more important when screening borrowers of lower credit quality. In addition to estimating the overall inference of creditworthiness, we also find that lenders infer a third of the variation in the dimension of creditworthiness that is captured by the credit score. This credit-score inference relies primarily upon standard hard information, but still draws relatively more from softer or less standard information when screening lower-quality borrowers. Our results highlight the importance of screening mechanisms that rely on soft information, especially in settings targeted at smaller borrowers. |
| JEL: | D53 D80 G21 L81 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp13-017&r=mfd |
| By: | Javier Alonso; Santiago Fernandez de Lis; Carmen Hoyo; Carlos Lopez-Moctezuma; David Tuesta |
| Abstract: | The low levels of banking penetration in the Mexican population, as compared to other Latin American countries, present the challenge of increasing the range of financial services towards new markets through the use of technological advances and innovative channels. Mobile phones are an attractive way to promote that range, given their extensive presence in the population and their capacity to rapidly and securely connect to carry out a transaction. In recent years, regulatory changes in Mexico have enabled us to establish favorable conditions for the development of the market for mobile banking: a regimen of simplified accounts, an extensive network of banking correspondents and specific regulations for mobile accounts. This new regulation, in some ways, followed in the steps of other international experiences in which the models based on a range of financial services through mobile telephony led to significant advances for the financial inclusion of the population without access to banking services. Against this backdrop, in 2012, several banks launched mobile banking products. Though they were generally well-received by the population, the use of a cell phone for carrying out transactions in the bank's payment system is still low as a percentage of the whole. In this paper, following a review of the recent developments and the regulatory framework, we will present a market quantification for the development of mobile banking, while taking supply and demand aspects into consideration. In our study, we found that the total potential demand gap for mobile banking could stand near 40%, which corresponds to the difference between the number of current bank accounts and possession of mobile phones, with the latter being understood as a channel to access the financial system. By gender, it was found that males have a greater number of accounts than females, and that the demand gap with respect to possession of a mobile phone is lower. In terms of level of education, the demand gap of the population is greater in those with secondary education. Finally, when carrying out the segmentation by age into 6 five-year interval groups, starting from the age of twenty-five, the demand gaps found were fairly similar. Extensive room for mobile banking development was observed in the country. Our study identified the existence of geographic and social-demographic characteristics associated to the Mexican case that could catalyze a greater level of adherence to mobile financial services, which would strengthen its viability and capacity to provide access to the population not covered by the traditional channels. |
| Keywords: | Financial inclusion, mobile banking, banking penetration |
| JEL: | G21 O16 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1320&r=mfd |
| By: | Guinnane, Timothy W. (Yale University); Ogilvie, Sheilagh C. (University of Cambridge) |
| Abstract: | The investment decisions of small-scale farmers in developing countries are conditioned by their financial environment. Binding credit market constraints and incomplete insurance can reduce investment in activities with high expected profits. We conducted several experiments in northern Ghana in which farmers were randomly assigned to receive cash grants, grants of or opportunities to purchase rainfall index insurance, or a combination of the two. Demand for index insurance is strong, and insurance leads to significantly larger agricultural investment and riskier production choices in agriculture. The salient constraint to farmer investment is uninsured risk: when provided with insurance against the primary catastrophic risk they face, farmers are able to find resources to increase expenditure on their farms. Demand for insurance in subsequent years is strongly increasing in a farmer's own receipt of insurance payouts, and with the receipt of payouts by others in the farmer's social network. Both investment patterns and the demand for index insurance are consistent with the presence of important basis risk associated with the index insurance, and with imperfect trust that promised payouts will be delivered. |
| JEL: | J12 J13 K00 N33 O17 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:yaleco:112&r=mfd |
| By: | Hermann Pythagore Pierre Donfouet (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes 1 - Université de Caen Basse-Normandie); Pierre-Alexandre Mahieu (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272) |
| Abstract: | Community-Based Health Insurance (CBHI) is an emerging concept for providing financial protection against the cost of illness and improving access to quality health services for low-income rural households who are excluded from formal insurance. CBHI is currently being provided in some rural areas in developing countries and there is ongoing research about its impact on the well-being of the poor in these areas. However, the success of CBHI revolves around the existence of social capital in the community. This has led researchers to explore the impact of CBHI on the well-being of the poor in rural areas, especially as it relates to social capital. The overall objective of this paper is to review recent developments that address the link between CBHI and social capital. Policy implications are also discussed. |
| Keywords: | Community-based health insurance ; social capital ; rural areas |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00738176&r=mfd |