nep-mfd New Economics Papers
on Microfinance
Issue of 2016‒03‒06
three papers chosen by
Olivier Dagnelie
Université de Caen

  1. Aid Volatility and Social Performance in Microfinance By Bert D'Espallier; Marek Hudon; Ariane Szafarz
  2. The Role of Trust-Control Mechanisms in Operations Processes: Mitigating Mission Drift in a Microfinance Institution in Gujarat, India By Viresh Amin
  3. Insufficiencies and loopholes of self- regulation in overindebtedness prevention: The case of the Dominican Republic By J. Afonso; Solène Morvant-Roux; Davide Forcella; Isabelle Guérin

  1. By: Bert D'Espallier; Marek Hudon; Ariane Szafarz
    Abstract: Uncertainty makes objectives harder to reach. This paper examines whether uncertainty in subsidies leads to mission drift in microfinance institutions (MFIs). Using a worldwide sample of 1,151 MFIs active in 104 countries, we find that interest rates increase with aid volatility while average loan size is inversely related to aid volatility. These results suggest that MFIs consider average loan size as a signaling device for commitment to their social mission, but use interest rates as an adjustment variable to cope with uncertainty. The policy prescription to donor agencies wishing to curtail the rise in interest rates is to deliver subsidies predictably and transparently.
    Keywords: Microfinance; subsidies; mission drift; average loan size; interest rate
    JEL: F35 G21 G28 O54 O57
    Date: 2016–02–18
  2. By: Viresh Amin (Department of Management, Birkbeck College University of London)
    Abstract: This study explores how managers of microfinance institutions (MFIs) use trust-control mechanisms in the operation processes to mitigate the problem of mission drift arising out of the need to meet the dual goals of social development and financial self-sustainability. Using a case study methodology, purposive sampling, and replication logic, data from the operations processes of four geographically different sites of a microfinance institution in Gujarat, India were analyzed. The findings suggest that the managers of microfinance institutions balance integrity-trust, benevolence-trust, competence-trust, and control mechanisms to achieve dual goals of social development and financial self-sustainability. The conditions and contingencies under which trust-control mechanisms are most effective for mitigating mission drift are identified. The findings also indicate that managers of the microfinance institution use calculative and relational forms of trust to achieve the empowerment of women borrowers along with the fulfilment of the aims of financial self-sustainability. Finally, the study places mission drift mitigation within its ethical context by examining client vulnerability and the MFI’s operational responses.
    Date: 2014–06
  3. By: J. Afonso; Solène Morvant-Roux; Davide Forcella; Isabelle Guérin
    Abstract: The Dominican Republic’s microfinance sector is considered to be a growing and solid market. However, the widely implemented overindebtedness prevention best practices are by themselves not sufficient to prevent financial fragility among a part of the MFIs’ clients.We identify these practices as self-regulation mechanisms and, based on fieldwork conducted between 2012 and 2015, we show how they fail to fully fulfil their goals in the Dominican market. While financial exclusion supports the idea of an unlimited microcredit market, we argue that the focus on growth imperatives and high competition strongly jeopardize the positive outcomes of microcredit on clients’ well-being.
    Keywords: microfinance; overindebtedness prevention; financial practices; self-regulation; Dominican Republic
    JEL: G10 G21 D18 R21
    Date: 2016–02–08

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