New Economics Papers
on Microfinance
Issue of 2013‒12‒15
six papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Practice what you preach: Microfinance business models and operational efficiency By Millone M.M.; Bos J.W.B.
  2. Understanding and Information Failures in Insurance: Evidence from India By Jean Philippe Platteau; Darwin Ugarte Ontiveros
  3. Rentabilidad versus profundidad del alcance: un análisis de las entidades microfinancieras peruanas, 2006-2011 By Aguilar, Ady; Galarza, Francisco
  4. After the Drought: The Impact of Microinsurance on Consumption Smoothing and Asset Protection By Sarah A. Janzen; Michael R. Carter
  5. Can capital grants help microenterprises reach the productivity level of SMEs? Evidence from an experiment in Sri Lanka By Laurin Janes
  6. Follow the Money: Methods for Identifying Consumption and Investment Responses to a Liquidity Shock By Dean Karlan; Adam Osman; Jonathan Zinman

  1. By: Millone M.M.; Bos J.W.B. (GSBE)
    Abstract: The microfinance sector is an example of a sector in which firms with different business models coexist. Next to pure for-profit microfinance institutions MFIs, the sector has room for non-profit organizations, and includes social for-profit firms that aim to maximize a double bot- tom line and do well while doing good. We introduce a benchmarking approach that accommodates these three business models and allows us to estimate the efficiency of MFIs when they operate true to their busi- ness model, but also when they drift away from their original design. Using a simple model, we hypothesize that it is more difficult to operate efficiently when pursuing a double bottom line. Our empirical results for a large sample of MFIs are in line with this hypothesis pure for-profit and non-profit FMIs are more efficient than social for-profit MFIs. In addition, efficiency decreases for all MFIs when they move away from their original business model. Increasing the risk of the loan portfolio reduces efficiency and lending to woman increases efficiency. Finally, our finding that multiple lending to borrowers is efficiency-enhancing may help explain the mission drift in microfinance.
    Keywords: Econometrics; Banks; Depository Institutions; Micro Finance Institutions; Mortgages; Microeconomic Analyses of Economic Development; Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance;
    JEL: G21 O12 O16 C01
    Date: 2013
  2. By: Jean Philippe Platteau (University of Oxford and University of Namur); Darwin Ugarte Ontiveros (University of Namur)
    Abstract: This paper is an attempt to understand the factors behind low contract renewal rates frequently observed in insurance programs in poor countries. This is done on the basis of the experience of a microinsurance health program in India. We show that deficient information about the insurance product and the functioning of the scheme, and poor understanding of the insurance concept are the major causes of the low contract renewal rate among households which had previously enrolled into the program. A central finding is that, when a household has received a large negative payout during the preceding year, it is more inclined to opt out of the program unless it has a good understanding of what insurance means. In other words, the adverse impact of negative insurance payouts on contract renewal is conditional upon the presence of a cognitive bias which violates the expected utility theory. Moreover, trust in the insurance company has a significant positive effect, yet that effect cannot be disentangled from that of understanding ability. The policy implication of our findings is considerable since they provide a strong justification for mandatory universal health insurance.
    Keywords: Microfinance, microinsurance, insurance literacy
    JEL: G21 I13 O12
    Date: 2013–11
  3. By: Aguilar, Ady; Galarza, Francisco
    Abstract: The rise of commercialization in microfinance we have witnessed in the last two decades has revived the debate about the trade-off between the sustainability and depth of outreach of the Microfinance Organizations (MFOs). We find evidence of such trade-off for the Peruvian MFOs (meaning that greater sustainability is attained at the expense of reducing the depth of outreach), a result that is entirely explained by the formal, regulated, MFOs. The inexistence of such trade-off for the unregulated MFOs (NGOs) is consistent with a profitable portfolio management, attained while still attending low-income individuals (no mission drift).
    Keywords: Microfinance, sustainability, depth of outreach, Peru
    JEL: G21 O16
    Date: 2013–06
  4. By: Sarah A. Janzen; Michael R. Carter
    Abstract: When natural disasters afflict poor communities that lack buoyant access to financial markets, households face the unsavory choice of reducing consumption in order to protect remaining assets, or selling assets at low prices in order to maintain consumption and nutrition. Both choices are costly and damage future economic potential. Formal insurance markets would seem to offer large private and social returns in these circumstances. This paper studies a drought-induced insurance payout from a pilot project in Kenya to determine whether insurance protects households from asset and consumption destabilization. Average treatment effect estimates show that insurance significantly reduces both kinds of costly coping. A closer examination using threshold estimation methods reveals that insurance has different impacts for different kinds of households. Households with larger asset bases--those shown to be most likely to sell assets in order to cope with a shock--are 64 percentage points less likely to do so when insured. Households with fewer assets--those most likely to decrease food intake as a coping strategy--are 43 percentage points less likely to do so with insurance. These results suggest that insurance can have a large impact on both the productivity of the current generation and the human capital of the next.
    JEL: G22 O12 O16
    Date: 2013–12
  5. By: Laurin Janes
    Abstract: Using data from a randomized control trial in Sri Lanka, this paper explores whether cash and in-kind grants helped microenterprises approach the productivity level of SMEs. The paper first estimates production functions and subsequently treatment effects on TFP levels. Most significantly, more able and more risk-averse owners benefit from the larger in-kind grant. Also, the larger in-kind grants allowed for increases in productivity to the least productive firms. The paper then uses data from a representative sample of formal firms to put the TFP levels and treatment effects in the microenterprises into perspective. The results suggest that the least productive firms where able to catch up with the average microenterprise and formal SMEs, while a gap remains with large firms. This finding encourages a positive view of the potential for productivity growth in microenterprises.
    Keywords: Economic development, microenterprises, formal informal, total factor productivity, embodied technology
    JEL: L25 O12 O14 O17 O33
    Date: 2013
  6. By: Dean Karlan; Adam Osman; Jonathan Zinman
    Abstract: Identifying the impacts of liquidity shocks on spending decisions is difficult methodologically but important for theory, practice, and policy. Using seven different methods on microenterprise loan applicants, we find striking results. Borrowers report uses of loan proceeds strategically, and more generally their reporting depends on elicitation method. Borrowers also interpret loan use questions differently than the key counterfactual: spending that would not have occurred sans loan. We identify the counterfactual using random assignment of loan approvals and short-run follow-up elicitation of major household and business cash outflows, and estimate that about 100% of loan-financed spending is on business inventory.
    JEL: D12 D92 G21 O12 O16
    Date: 2013–12

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