nep-mfd New Economics Papers
on Microfinance
Issue of 2015‒01‒31
eight papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Default and Risk Premia in Microfinance Group Lending By P Simmons (York) ; N Tantisantiwong (Southampton)
  2. The Effectiveness of Regulatory and Supervisory Framework of Islamic Microfinance in Sudan By Saaid Ali, Abd Elrahman Elzahi
  3. Group Lending Policy and Repayment Rate in Islamic Microfinance Institutions By Ismail, Abdul Ghafar ; Yussof, Wan Nor AisyahWan
  4. Regulatory Framework for Member-Owned Islamic By Shah Shirazi, Nasim ; Bashir, Muhammad ; Yusuf, Owolabi ; Abdullah, Moha Asri
  5. A Framework for Regulating Islamic Microfinance Institutions By Ismail, Abdul Ghafar
  6. Impact of integrated programs for monthly households consumption expenditure: empirical evidence from Northern Ethiopia By Deresse, Fekadu Nigussie ; Calfat, Germán
  7. Individual Insurance and Mutual Support Arrangements in Developing Countries By Friederike Lenel
  8. Mobile Money: The Effect of Service Quality and Competition on Demand By Karthik Balasubramanian ; David F. Drake

  1. By: P Simmons (York) ; N Tantisantiwong (Southampton)
    Abstract: For a risk neutral lender and a group of borrowers facing identical revenue risks we compare individual loans and group lending. We stress the importance of group liquidity in defining the necessary risk premium. There are no welfare differences between the loan forms. However, the default rates and risk premia vary ambiguously between the loan forms. Simulations replicating empirical interest rates and default rates show that the group interest rate is lower for a larger group while the effect of group size on default risk is ambiguous. We then consider the case of identical correlated risks between borrowers. Positive correlation of projects gives a higher downward risk, so a higher group interest rate and a higher fraction of successes are required. Unlike independent group lending, the interest rate and the default risk are not lower in the larger group loan with correlated returns. Simulations using beta-binomial distributionsare presented.
    Keywords: Group lending, default rate, interest rate, correlated outcomes
    JEL: G21 O16
    Date: 2014–12
  2. By: Saaid Ali, Abd Elrahman Elzahi (The Islamic Research and Teaching Institute (IRTI) )
    Abstract: Islamic microfinance is one of the essential inconventional branch of lending that uses by Islamic microfinance providers for financial and social inclusion to provide resources for low-income people as well as the extremely poor. Through the in-bodied social inclusion tools, Islamic microfinance can best used to mitigate the negative impact of the extreme poverty. Since financing micro-borrowers and extremely poor are highly risk, the need for efficient and effective regulatory and supervision of microfinance frame work is very important. This research investigated Sudanese Islamic microfinance regulatory and supervisory framework. Despite of the exerted efforts by Sudanese government through providing favorable climate and the establishment of Islamic financial intuitions and establishing structured microfinance framework, the results showed that Sudanese microfinance regulatory framework is not providing best outreach. Through more than ten years since the first initiative the results illegible clients have reached less than 3%. Despite the continuous increasing of the ceiling portfolio by the regulatory authority until reached 12% from 4% since the first issued rules in 2006, the actually utilization only 2% at the end of the year 2013. This might be due to several reasons such as bad basic infrastructures, ineffective follow up by the regulator of the microfinance providers, Islamic microfinance deliberately ignoring the rural areas clients’ because of the high risk, the framework lack of the building capacity tools for clients as well as for the microfinance providers staff. The results of this research gives strong policy implications for both to Islamic microfinance regulator and providers to carry on real revision and evaluation for the efficiency and effectiveness of the current operated microfinance frame work in Sudan. The results might be useful for Islamic microfinance regulators and providers in Muslims countries and interested providers in the West the benefit from the nullified factors that render the regulatory framework ineffective.
    Keywords: Islamic Microfinance; Regulatory and Supervision
    Date: 2015–01–19
  3. By: Ismail, Abdul Ghafar (The Islamic Research and Teaching Institute (IRTI) ); Yussof, Wan Nor AisyahWan
    Abstract: The paper intends to contribute to the ongoing debate of whether group-lending policy are sustainable and able to achieve and maintain sound repayment performance, while serving poor borrowers without the support of third parties such as takaful operator. By aiding new features in better promoting group lending policy with hiwalah, it can further promote the development and sustainability of Islamic microfinance institutions.
    Keywords: lending policy; hiwalah; Islamic microfinance; repayment rate
    Date: 2015–01–19
  4. By: Shah Shirazi, Nasim (The Islamic Research and Teaching Institute (IRTI) ); Bashir, Muhammad (The Islamic Research and Teaching Institute (IRTI) ); Yusuf, Owolabi (The Islamic Research and Teaching Institute (IRTI) ); Abdullah, Moha Asri (The Islamic Research and Teaching Institute (IRTI) )
    Abstract: Member-owned Islamic microfinance institutions have been toast to be the alternative means of financial inclusion among the Muslims who are voluntary excluded from participating in the traditional member-owned microfinance institutions because of the interest they charge. This novel idea is still new and few are known about its operations and regulations guiding its operation. This paper surveys the practices of the common member owned Islamic microfinance in Sub-Saharan Africa with a view to recommend regulatory framework for its operation based on member practice. This paper proposes a number of regulations for the operation of both Islamic Saving Group and Financial Cooperation. It is hoped that these proposed regulations will assist the operator, policy makers and donor agencies to chat a way to improve the financial inclusiveness of poor people who are excluded from benefiting from the available member-owned microfinance institutions with a view to lift them out of poverty.
    Keywords: Member-Owned Islamic Microfinance; Regulatory Framework; Financial Inclusiveness; Saving Group; Financial Cooperative.
    Date: 2015–01–19
  5. By: Ismail, Abdul Ghafar (The Islamic Research and Teaching Institute (IRTI) )
    Abstract: Regulation is crucial for many reasons. More important than that is to produce an effective regulatory framework. In this paper, we will find that the first step in this framework is the philosophical foundation of Islamic microfinance institution’s establishment that is formulated in their operations and incentives. Second, the policy issues related to regulations need to be addressed, among others: Islamic microfinance institution activities and Islamic microfinance institution-philanthropy links; effectiveness and sustainability; shariah based business model; who are the regulators; and ownership. Finally, several guidelines will be introduced to produce environmentally effective regulations, among others are the guideline on: the shariah advisory council, corporate governance, group lending policy, loan loss financing, minimum capital and micro-takaful scheme.
    Keywords: regulation policy; Islamic microfinance institutions; regulatory philosophy; shariah
    Date: 2015–01–19
  6. By: Deresse, Fekadu Nigussie ; Calfat, Germán
    Abstract: The “minimalist” approach that once dominated microfinance outreach in the past is now a fading memory. A growing number of studies are suggesting a more “integrative” approach to support the marginalized and ultra-poor households. This study highlights the impact of the integrated programs-Village Saving and Loan Association (VSLA) and Productive Safety Net Programs (PSNP)-in Sekota district, Northern Ethiopia on consumption expenditure of households. Endogenous Switching Regression model is fitted to minimize threats of self-selection bias, unobserved characteristics and heterogeneity effect. The result reveals that self-selected participant in the integrated program has a significant and positive impact on monthly consumption expenditure compared with the random participants and non-participants.
    Keywords: Endogenous switching regression; Productive Safety Net Programme; Self-selection bias; Village Saving and Loan Association; Ethiopia
    Date: 2014–11
  7. By: Friederike Lenel
    Abstract: Insurance coverage in the developing world is expanding rapidly. As recently as 2005, only a small number of commercial insurers offered insurance products that specifically targeted low-income people (‘microinsurance’). Seven years later, in 2012, more than half of the world’s 50 largest insurance companies were involved in microinsurance. International donor organizations, which identified the promotion of social protection systems as a key priority, strongly encourage this development. Yet, while the positive role insurance can play for poverty reduction is fairly uncontroversial, the potential negative side-effects of the rapid insurance expansion are less apparent. One concern is that the establishment of formal insurance schemes can lead to a paradigm shift: market-based schemes crowd-out social cohesion; adversely affecting the mutual support arrangements that form an important pillar of the risk management strategies of the poor. Evidence isnot clear-cut.
    Date: 2015
  8. By: Karthik Balasubramanian (Harvard Business School ); David F. Drake (Harvard Business School, Technology and Operations Management Unit )
    Abstract: The use of electronic money transfer through cellular networks ("mobile money") is rapidly increasing in the developing world. The resulting electronic currency ecosystem could improve the lives of the estimated 2 billion people who live on less than $2 a day by facilitating more secure, accessible, and reliable ways to store and transfer money than are currently available. The development of this ecosystem requires a network of agents to conduct cash-for-electronic value transactions and vice versa. This paper estimates the effect of competition and service quality on mobile money demand. In this setting, service quality consists of service reliability (lower stockout and system downtime rates), pricing transparency, and agent expertise. Among our results, we find that agents experience reduced demand for service failures due to stockouts, but not for service failures due to network downtime, suggesting that consumers differentially ascribe responsibility for service failure based on the type of failure they experience. We find that both stockout rate and agent expertise are important competitive dimensions in this setting. Pricing transparency, on the other hand, has a main effect on demand but has no significant interaction with competitive intensity. This paper furthers our understanding of the impact and interaction of quality and competition in service settings, while developing a foundation for the exploration of mobile money by OM scholars.
    Keywords: service operations, operations strategy, competition, base of the pyramid, mobile money
    Date: 2015–01

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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