nep-mfd New Economics Papers
on Microfinance
Issue of 2014‒11‒12
four papers chosen by
Olivier Dagnelie
Université de Namur

  1. Sequential lending with dynamic joint liability in micro-finance By Chowdhury, Shyamal; Roy Chowdhury, Prabal; Sengupta, Kunal
  2. Microfinance Environment in Uzbekistan: Analysis of Supply and Demand By Nargiza Alimukhamedova
  3. Drivers of entrepreneurship and post-entry performance of newborn firms in developing countries By Quatraro, Francesco; Vivarelli, Marco
  4. Basis Risk and the Welfare Gains from Index Insurance: Evidence from Northern Kenya By Jensen, Nathaniel D.; Barrett, Christopher B.; Mude, Andrew G.

  1. By: Chowdhury, Shyamal; Roy Chowdhury, Prabal; Sengupta, Kunal
    Abstract: This paper develops a theory of sequential lending in groups in micro-finance that centers on the notion of dynamic incentives, in particular the simple idea that default incentives should be relatively uniformly distributed across time. In a framework that allows project returns to accrue over time, as well as strategic default, we show that sequential lending can help resolve problems arising out of coordinated default, thus improving project efficiency vis-a-vis individual lending. Inter alia, we also provide a justification for the use of frequent repayment schemes, as well as demonstrate that, depending on how it is manifested, social capital has implications for project efficiency and borrower default. We next examine the optimal choices for the MFI and derive conditions for the optimality of the group lending arrangement. Our framework also provides for some plausible hypotheses as to why there has been a recent transition from group to individual lending.
    Keywords: Collusion; coordinated default; dynamic incentives; frequent repayment; group-lending; MFI competition; micro-finance; sequential financing; social capital; switch to individual lending
    JEL: D7 D9 G2 O2
    Date: 2014–09
  2. By: Nargiza Alimukhamedova (CERGE-EI)
    Abstract: The paper describes the microfinance environment in Uzbekistan, with an emphasis on two types of non-bank microfinance institutions – Credit Unions and Microcredit Organizations. The specific nature of these institutions provides new evidence of the commercially oriented microcredit model and SME lending, which is an emerging trend in mainstream microfinance. The paper offers two important contributions. On the supply side of microcredits, we analyse the determinants of initial placement of these MFIs in districts of Uzbekistan. We find that MFIs follow general economic principles when choosing the location for establishment. On the demand side, we analyse the actual margins of excess demand for microcredits by considering only the pool of eligible applicants. We find that the total probability of microcredit approval is on average only 0.5, which implies that the actual margins of untapped market could be just half of that projected when the narrow definition of eligible applicants is taken into account.
    Keywords: microcredit, microfinance institutions, credit unions
    JEL: O16 C34
    Date: 2014–08
  3. By: Quatraro, Francesco; Vivarelli, Marco
    Abstract: The aim of this paper is to provide an updated survey of the"state of the art"in entrepreneurial studies with a particular focus on developing countries (DCs). In particular, the concept of"entrepreneurship"is critically discussed, followed by a discussion of the institutional, macroeconomic, and microeconomic conditions that affect the entry of new firms and the post-entry performance of newborn firms. The reviewed literature bears some policy implications for the support of the creation new firms, such as the targeting of policy measures to prospective entrepreneurs who possess high education levels, long previous job experience, and innovative skills. Specifically, for DCs, tailored subsidies and support should be coupled with framework and infrastructural policies that are able to improve the business environment such that new ventures can start and grow.
    Keywords: Microfinance,Environmental Economics&Policies,Access to Finance,Small Scale Enterprise,Banks&Banking Reform
    Date: 2014–10–01
  4. By: Jensen, Nathaniel D.; Barrett, Christopher B.; Mude, Andrew G.
    Abstract: Index insurance products circumvent many of the transaction costs and asymmetric information problems that obstruct provision of low value conventional insurance policies in developing countries. Recent years have seen tremendous growth in index insurance pilots in developing countries, but there has been little progress in our understanding of the quality of those products. Basis risk, or remaining uninsured risk, is a widely recognized, but rarely measured drawback of index insurance that carries significant implications for the quality of any such product. This research uses a rich longitudinal household dataset to examine basis risk associated with an index based livestock insurance (IBLI) product available to pastoralists in northern Kenya since 2010. We find that IBLI coverage reduces downside risk for most households when purchased at actuarially fair premium rates and has net utility benefits for most even at commercial rates. Examining the components of basis risk, we find that IBLI reduces exposure to covariate risk due to high loss events by an average of 62.8%. The benefits of reduced covariate risk exposure are relatively small, however, due to high exposure to seemingly mostly random idiosyncratic risk, even in this population often thought to suffer largely from covariate shocks. Depending on covariate region, IBLI policy holders are left with an average of between 62.3% and 76.7% of their original risk due to high loss events. This research underscores the need for caution when promoting index insurance as a tool for reducing exposure to risk and the importance of ex post product evaluation.
    Keywords: index insurance, basis risk, pastoralists, Kenya
    JEL: O1 O16
    Date: 2014–09

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