nep-mfd New Economics Papers
on Microfinance
Issue of 2015‒01‒09
nine papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Optimal Joint Liability Lending and with Costly Peer Monitoring By Carli, Francesco; Uras, R.B.
  2. Has Microfinance Lost its Moral Compass? By David Hulme; Mathilde Maitrot
  3. Financial Inclusion, Regulation, and Education in Sri Lanka By Kelegama, Saman; Tilakaratna, Ganga
  4. Improving Credit Access for the Food and Agriculture Sector through Enhanced Implementation of Existing Policies and New Strategies By Gary B. Teves
  5. Informality and Access to Finance : Evidence from India By Beck, T.H.L.; Hoseini, M.
  6. Key Players By Zenou, Yves
  7. Insurance companies of the poor By Bold, Tessa; Dercon, Stefan
  8. How Basis Risk and Spatiotemporal Adverse Selection Influence Demand for Index Insurance: Evidence from Northern Kenya By Jensen, Nathaniel; Mude, Andrew; Barrett, Christopher
  9. Impact of Ethiopia’s Community Based Health Insurance on household economic welfare By Debebe, Z.Y.; Mebratie, A.D.; Sparrow, R.A.; Dekker, M.; Alemu, G.; Bedi, A.S.

  1. By: Carli, Francesco; Uras, R.B. (Tilburg University, Center For Economic Research)
    Abstract: This paper characterizes an optimal group loan contract with costly peer monitoring. Using a fairly standard moral hazard framework, we show that the optimal group lending contract could exhibit a joint-liability scheme. However, optimality of joint-liability requires the involvement of a group leader, who heavily takes care of the partner's repayment share in bad states and gets compensated in expected terms. This key result holds even for a group of borrowers, which exhibits homogeneous characteristics in productivity, risk aversion and monitoring costs. Our work rationalizes the widely-applied group-leadership concept of microfinance programmes as an outcome of an optimal contract.
    Keywords: Micro finance; Joint-liability; Group leader.
    JEL: G21 O12 O16
    Date: 2014
  2. By: David Hulme; Mathilde Maitrot
    Abstract: Abstract This paper argues that microfinance in South Asia, like mainstream finance in North America and Europe, "has lost its moral compass". Our particular concern is with microloans to vulnerable clients. Microfinance institutions (MFIs) have increasingly focussed on financial performance and have neglected their declared social mission of poverty reduction and empowerment. Loans officers in the field are under enormous pressure to achieve individual financial targets and now routinely mistreat clients – especially poor women. The values of neo-liberal mainstream finance in the rich world have spread to microcredit in the villages of Bangladesh and India. This situation is hidden from western publics who are fed the lie of "the magic of microfinance" by their media, guided by the needs and interests of mainstream finance seeking to provide some "good news" about the financial sector as scandal after scandal unfold. Urgent action is needed, particularly from the leaders of the microfinance industry, to refocus their organizations and workforce on achieving both financial and social performance targets.
    Date: 2014
  3. By: Kelegama, Saman (Asian Development Bank Institute); Tilakaratna, Ganga (Asian Development Bank Institute)
    Abstract: Sri Lanka has achieved a high level of financial inclusion compared to other South Asian countries. Its financial sector comprises a wide range of financial institutions providing financial services such as loans, savings, pawning, leasing and finance, and remittance and money transfer facilities. There is also evidence that a larger share of households in Sri Lanka accesses multiple financial institutions for their credit and savings needs. However, the use of insurance services, ATM facilities, e-payments, and mobile banking, is relatively low. Financial education is ad hoc and lags behind financial innovation and new products. The information technology (IT) literacy rate is only 35% in Sri Lanka, and with the growing IT–finance nexus, financial awareness and education have become all the more important. Strengthening the regulatory framework governing the microfinance sector and client protection is also crucial for improving financial inclusion in Sri Lanka. Much scope remains to improve financial inclusion, particularly related to cost and quality of financial services provided, and the sustainability of financial institutions.
    Keywords: financial services; financial inclusion; financial education; financial regulation; microfinance
    JEL: G20 G21 G28
    Date: 2014–11–20
  4. By: Gary B. Teves
    Abstract: For several decades, the government has sought to develop the agriculture sector through programs like agrarian reform, agricultural modernization and rural finance, but farmers and fisherfolk remain to be the poorest sector in the Philippines. This paper seeks to explore ways to improve small farmers and fisherfolks’ access to credit provided by formal financial institutions. The government needs to implement and improve on its existing programs, identified in this study, and combine these with policy reforms and new strategies to fast-track the development of the food and agriculture sector to make economic growth more inclusive.
    Keywords: Agriculture, Financial Institutions and Services, Agricultural Finance, Agricultural Credit
    JEL: G21 O13 Q14
    Date: 2014–11
  5. By: Beck, T.H.L. (Tilburg University, Center For Economic Research); Hoseini, M. (Tilburg University, Center For Economic Research)
    Abstract: This paper gauges the effect of financial deepening and bank outreach on informality using micro data from the Indian manufacturing sector and exploiting cross-industry variation in the need for external finance. We distinguish between two channels through which access to finance can reduce informality: reducing the entry barrier to the formal sector and increasing productivity of formal firms. We find that bank outreach has a stronger effect on reducing the incidence of informality by cutting barriers to entering the formal economy, especially for smaller firms, and thus diminishing opportunistic informality. In comparison, financial deepening increases the productivity of formal sector firms while it has no significant impact on informal sector firms.
    Keywords: nformality; Financial Development; India
    JEL: G21 G28 O15 O16
    Date: 2014
  6. By: Zenou, Yves
    Abstract: In this chapter, we provide an overview on the literature on key players in networks. We first introduce the theoretical concept of the key player, which is the agent that should be targeted by the planner so that, once removed, she will generate the highest level of reduction in total activity. We also consider another notion of key player where the planner is targeting a set of network nodes that are optimally positioned to quickly diffuse information, attitudes, behaviors or goods. We then examine the empirical tests of the key-player policies for criminal networks, education, R&D networks, financial networks and diffusion of microfinance. We show that implementing such a policy outperforms other standard policies such as targeting the most active agents in a network.
    Keywords: crime policies; diffusion; Katz-Bonacich centrality; Key players
    JEL: A14 D85 K42 Z13
    Date: 2014–12
  7. By: Bold, Tessa; Dercon, Stefan
    Abstract: We model the emergence of formal insurance institutions as equilibria under limited contract enforceability where groups are required to be coalition-proof but also can use fines for enforcement. The model can generate coexistence of formal and informal groups without requiring heterogeneity in insurance demand, because coalition-proof equilibria can fail to exist. It also predicts where formal insurance is likely to flourish: insurance groups that hold savings become more prevalent the more enforcement power communities have, and the more enforcement power, the better insurance. We use data on Ethiopian funeral insurance groups and their members to motivate and test our model. Those which hold savings and collect regular premia provide better insurance than informal ones, and both sets of groups employ a variety of punishment mechanisms to induce their members to share risk. Despite the observed positive correlation between formality and the quality of insurance, informal and formal groups co-exist. Consistent with predictions generated by the model, we find that standard measures of social cohesion are linked to the use of punishment mechanisms, the quality of insurance and the prevalence of formal insurance institutions.
    Keywords: institutions; insurance; limited commitment; savings; social capital
    JEL: C73 D02 E21
    Date: 2014–12
  8. By: Jensen, Nathaniel; Mude, Andrew; Barrett, Christopher
    Abstract: Basis risk – the remaining risk that an insured individual faces – is widely acknowledged as the Achilles Heel of index insurance, but to date there has been no direct study of its role in determining demand for index insurance. Further, spatiotemporal variation leaves open the possibility of adverse selection. We use rich longitudinal household data from northern Kenya to determine which factors affect demand for index based livestock insurance (IBLI). We find that both price and the non-price factors studied previously are indeed important, but that basis risk and spatiotemporal adverse selection play a major role in demand for IBLI.
    Keywords: Pastoralists, Index Insurance, Uptake
    JEL: D81 O16 Q12
    Date: 2014–12–08
  9. By: Debebe, Z.Y.; Mebratie, A.D.; Sparrow, R.A.; Dekker, M.; Alemu, G.; Bedi, A.S.
    Abstract: In 2011, the Government of Ethiopia launched a pilot Community-Based Health Insurance (CBHI) scheme. This paper uses three rounds of household survey data, collected before and after the introduction of the CBHI pilot, to assess the impact of the scheme on household consumption, income, indebtedness and livestock holdings. We find that enrolment leads to a 5 percentage point – or 13 percent – decline in the probability of borrowing and is associated with an increase in household income. There is no evidence that enrolling in the scheme affects consumption or livestock holdings. Our results show that the scheme reduces reliance on potentially harmful coping responses such as borrowing. This paper adds to the relatively small body of work which rigorously evaluates the impact of CBHI schemes on economic welfare.
    Date: 2014–08–08

This nep-mfd issue is ©2015 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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