nep-mfd New Economics Papers
on Microfinance
Issue of 2017‒02‒05
two papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Mission Drift in Microcredit and Microfinance Institution Incentives By Sara Biancini; David Ettinger; Baptiste Venet
  2. Banking Crises and the Performance of MIFs By Rui, Chen; Hartarska, Valentina

  1. By: Sara Biancini (Université de Caen-Normandie, CREM UMR CNRS 6211, France); David Ettinger (Université Paris Dauphine, PSL, LEDa and CEREMADE, France); Baptiste Venet (Université Paris Dauphine, PSL, IRD, LEDa, UMR225, DIAL, France)
    Abstract: We analyze the relationship between Micro nance Institutions (MFIs) and external donors, with the aim of contributing to the debate on ``mission drift" in microfinance. We assume that both the donor and the MFI are pro-poor, possibly at different extents. Borrowers can be (very) poor or wealthier (but still unbanked). Incentives have to be provided to the MFI to exert costly effort to identify the more valuable projects and to choose the right share of poorer borrowers (the optimal level of poor outreach). We first concentrate on hidden action. We show that asymmetric information can distort the share of very poor borrowers reached by loans, thus increasing mission drift. We then concentrate on hidden types, assuming that MFIs are characterized by unobservable heterogeneity on the cost of effort. In this case, asymmetric information does not necessarily increase the mission drift. The incentive compatible contracts push efficient MFIs to serve a higher share of poorer borrowers, while less efficient ones decrease their poor outreach.
    Keywords: Microfinance, Donors, Poverty, Screening
    JEL: O12 O16 G21
    Date: 2017–02
  2. By: Rui, Chen; Hartarska, Valentina
    Abstract: The global financial crisis that started in 2007 and 2008 affected financial markets across the world. In many countries, it was followed by local financial crises with severe consequences for marginalized borrowers such as micro and small businesses and consumers with already limited access to financial services. Such clients are typically served by Microfinance Institutions, which provide loans, savings and payment facilities to a target clientele. We study how the spread of the financial troubles resulting from the 2007-2008 crisis affected these MFIs institutions’ ability to achieve their double bottom line to remain financially sustainable and to reach as many marginalized clients as possible. Our data consist of 2,611 MFIs from 118 countries and is for the 1998-2011 period. We employ the fixed effect model with Difference in Difference (DID) specification and control for country and organization-specific characteristics. Results show that the global financial crisis had a negative impact on the ability of MFIs to serve many clients (measured by the number of active borrowers) but it had no negative impact on financial sustainability (measured by operational self-sufficiency and return on assets). This suggests that MFIs have dealt with the crises just like banks, namely restricting credit and serving fewer presumably larger borrowers.
    Keywords: microfinance institutions, financial crisis, financial system, outreach and sustainability, Industrial Organization, Institutional and Behavioral Economics, International Development,
    Date: 2017

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