New Economics Papers
on Microfinance
Issue of 2014‒05‒04
two papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Financial performance and social goals of microfinance institutions By Julian Schmied
  2. Horizontal and Vertical Linkages between Formal and Informal Credit Markets in Backward Agriculture: A Theoretical Analysis By Chaudhuri, Sarbajit; Dwibedi, Jayanta

  1. By: Julian Schmied
    Abstract: Critics argue that there has been a trend among Microfinance Institutions (MFI) to focus on profitability in order to stay financially sustainable. This made some institutions neglect the social mission of microfinancing. In this paper I intend to examine if empirical evidence supports this so called mission drift hypothesis as well as other claims in this context. Using the global panel data set of the MIX (Microfinance Information Exchange), which gathers from 1995 to 2010 and contains up to 1400 institutions with a high variety of organizational forms, I was able to identify a world-wide mission drift effect in their social goal of reaching out the poorest part of the population. Furthermore, I find that, on average, the outreach of an MFI has a significant negative influence on its short and long term financial performance. Despite that, I eventually proved that the probability that an MFI worsens its social performance substantially increases if its profitability has decreased in the previous years.
    Keywords: microfinance institutions, micro loans, mission drift, financial performance, social goals
    Date: 2014–04
  2. By: Chaudhuri, Sarbajit; Dwibedi, Jayanta
    Abstract: The paper shows that the policy of forging a vertical linkage between the formal and informal credit markets is distinctly superior to the existing credit policy of horizontally substituting the informal sector by the formal one. An inflow of subsidized formal credit to the informal lenders not only ensures better terms of borrowing to the small borrowers but also leads to higher agricultural productivity vis-à-vis the horizontal linkage case. Even if the informal sector lenders are allowed to collude, the informal interest rate is still lower in the vertical linkage case.
    Keywords: Formal credit, informal credit, horizontal linkage, vertical linkage, moneylender, collusion.
    JEL: D89 O1 O17 Q1 Q14
    Date: 2014–05–01

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