nep-mfd New Economics Papers
on Microfinance
Issue of 2016‒06‒14
three papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Microcredit in Industrialized Countries: Unexpected Consequences of Regulatory Loan Ceilings By Anastasia Cozarenco; Ariane Szafarz
  2. A Microfinance Model of Insurable Covariate Risk and Endogenous Effort By Dougherty, John; Miranda, Mario
  3. The Impact of Receiving Indemnity Payout on Informal Risk Sharing By Xu, Chang; Miranda, Mario

  1. By: Anastasia Cozarenco; Ariane Szafarz
    Abstract: Subsidized microfinance institutions (MFIs) provide affordable credit to small entrepreneurs. Many industrialized countries regulate MFIs. But in a market with accessible small business financing, regulatory loan ceilings can jeopardize the supply of microcredit to the most disadvantaged people. This is because small entrepreneurs in need of above-ceiling credit have the option to combine a ceiling-high microcredit with a supplementary loan from a regular bank. By reducing information asymmetry, this type of co-financing may prompt MFIs to divert credit away from entrepreneurs seeking below-ceiling loans. This study uses hand-collected data from a French MFI to test, and partly confirm, this theory.
    Keywords: Microcredit; microfinance; regulation; loan ceiling; self-employment; entrepreneurs
    JEL: G21 L51 G28 O52 L31 I38 C25 M13
    Date: 2016–04–29
  2. By: Dougherty, John; Miranda, Mario
    Abstract: Previous literature suggests that weather based index insurance has the potential to greatly benefit poor rural households that are exposed to significant sources of systemic risk. This study proposes a simple model of how providing index insurance may reduce moral hazard problems inherent in microfinance contracts. Through increasing the value of the dynamic incentive of repayment, the model demonstrates that providing index insurance can increase endogenous effort choice, particularly for joint liability loans, provided that insurance premiums are sufficiently low.
    Keywords: Microfinance, Index Insurance, Moral Hazard, Endogenous Effort, Agricultural and Food Policy, International Development,
    Date: 2016
  3. By: Xu, Chang; Miranda, Mario
    Abstract: Recent research has proposed combining index insurance with informal group risk sharing to overcome the individual shortcomings of informal risk sharing and index insurance. If this complimentary relationship holds universally, it can potentially: 1. alleviate the low take-up rate puzzle faced by index insurance pilot programs; 2. improve the sustainability of informal risk sharing in the case of aggregate shocks. We specifically investigated the hypothesis that the availability of indemnity payment from index insurance will increase the involvement in informal risk sharing. We utilized the Index-Based Livelihood Insurance program piloted on pastoralists in Kenya and use the data provided by the International Livestock Research Institute. We found that, except for receiving cash, having received index insurance indemnity significantly increases the tendency to receive cash, receive in-kind transfer and give in-kind transfer as a gift from/to any other households.
    Keywords: index insurance, informal risk sharing, Kenya, drought, basis risks, Agricultural Finance, Crop Production/Industries, International Development, Livestock Production/Industries, Risk and Uncertainty, D81, O16, O 17,
    Date: 2016–05

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