nep-mfd New Economics Papers
on Microfinance
Issue of 2018‒03‒26
two papers chosen by
Olivier Dagnelie
Université de Caen

  1. Loan Contract Structure and Adverse Selection: Survey Evidence from Uganda By Gulesci, Selim; Madestam, Andreas; Stryjan, Miri
  2. A Theory of Social Finance By Simon Cornée; Marc Jegers; Ariane Szafarz

  1. By: Gulesci, Selim; Madestam, Andreas; Stryjan, Miri
    Abstract: While adverse selection is an important theoretical explanation for credit rationing it is difficult to empirically quantify. One reason is that most studies measure the elasticity of credit demand of existing or previous borrowers as opposed to the population at large. We circumvent the issue by surveying a representative sample of microenterprises in urban Uganda and present evidence of adverse selection in two key dimensions of credit contracts - interest rates and collateral requirements. Theory suggests that a lower interest rate or a lower collateral obligation should increase take up among less risky borrowers. Using hypothetical loan demand questions, we test these predictions by examining if firm owners respond to changes in the interest rate or the collateral requirement and whether take up varies by firms' risk type. We find that contracts with lower interest rates or lower collateral obligations increase hypothetical demand, especially for less risky firms. The effects are particularly strong among manufacturing businesses. Our results imply that changes to the standard microfinance product may have substantial effects on credit demand.
    Keywords: Adverse Selection; Collateral; interest rates; Microfinance; SMEs
    JEL: D22 G21 O12
    Date: 2018–02
  2. By: Simon Cornée (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique); Marc Jegers; Ariane Szafarz (CERMi - Centre for European Research in Microfinance)
    Date: 2018–02–26

This nep-mfd issue is ©2018 by 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.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.