nep-mfd New Economics Papers
on Microfinance
Issue of 2018‒09‒10
two papers chosen by
Olivier Dagnelie
Université de Caen

  1. Borrower-Specific and Institutional Factors Leading to the Forced or Voluntary Exit of Microfinance Borrowers By Cesar Escalante; Hofner Rusiana
  2. Design and Rating of Risk-Contingent Credit for Balancing Business and Financial Risks for Kenyan Farmers By Shee, A.; Turvey, C.; You, L.

  1. By: Cesar Escalante (University of Georgia); Hofner Rusiana (University of Georgia)
    Abstract: Microfinance borrowers tend to have no properties to offer as loan security (collateral) as they are poor and low-income, and thus would constitute a considerable risk to lenders once they default. MFIs, therefore, have to device a system to ensure that loan defaults are as low as possible in order to maintain their financial sustainability, without which they would resort to higher interest rates that would only defeat the original intent of their microfinance lending philosophy.This paper seeks to identify factors that affect the voluntary exits or forced eviction of Philippine borrowers from microfinance lending networks focusing on indicators that are (a)internal to the borrowers? personal circumstances and business operating environments; and(b)those that capture the microfinance institutions? loan delivery operations. The analysis will analyze data compiled by the Social Enterprise Development Partnerships, Inc. (SEDPI) on micro-insurance borrowers in the Philippines from 2000 to 2010. Econometric analysis will employ Heckman selection techniques to determine significant determinants of either the forced eviction or the voluntary exit of MFI borrowers. Two versions of the Heckman equation system will be developed. The first version defines the selection equation to select MFI borrower observations who were forced to leave the program (FORCED=1; VOLUNTARY=0) for the outcome equation that identifies significant factors behind such MFI action. The second version?s selection equation focuses on the voluntary borrower exits (VOLUNTARY=1; FORCED=0) so that the outcome equation will determine significant factors behind such borrowers? decisions. Explanatory variables will capture personal, business, Centre-related, and macroeconomic factors. Expected results will shed light on how sudden changes in personal circumstances of certain borrowers (physical and economic), business viability issues (often associated with macroeconomic conditions), and institutional factors affecting borrower servicing and other borrower-lender relationship issues may lead to either the MFIs? decision to evict certain borrowers or individual borrowers voluntarily deciding to exit from the MFI lending system. This study offers important implications on achieving a proper balance of financial sustainability and social outreach goals of microfinance operations. This balancing of goals has been a difficult challenge for most MFIs globally. The Philippine microfinance experience may help shed light on possible remedies to this elusive balancing goal.
    Keywords: microfinance, forced exit, voluntary exit, financial sustainability, loan repayment, loan delivery
    JEL: D19 G21 L26
    Date: 2018–07
  2. By: Shee, A.; Turvey, C.; You, L.
    Abstract: Weather related agricultural risks and limited access to credit are serious impediments to agricultural productivity and growth in developing countries. This paper describes a novel insurance linked credit model piloted in Kenya, where insurance markets are effectively absent and farmers do not borrow because of the risk of losing their collateral. One of the challenges in deigning bundled credit products, in the absence of traded securities, is the actuarial pricing and risk rating of the insurance and the loan product. We develop a rainfall linked risk-contingent credit that transfers drought risk related perils from borrower to lender via insurance mechanism that provide a balance between business and credit risks for smallholder farmers. We describe the methodology used to design and rating of a risk-contingent structured operating agricultural credit instrument using CHIRPS rainfall data from 1981-2016 in Kenya. We illustrate the use of Monte Carlo methods to risk modelling that can be integrated within general insurance and credit rating framework. The innovative design and methodology presented in this paper are as important as the product delivery mechanism and will be of interest to specialists in development economics and agricultural finance.
    Keywords: Agricultural Finance, International Development, Risk and Uncertainty
    Date: 2018–07

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