nep-mfd New Economics Papers
on Microfinance
Issue of 2019‒02‒11
five papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Take-up of joint and individual liability loans: an analysis with laboratory experiments By Susmita Baulia
  2. Do remotely-sensed vegetation health indices explain credit risk in agricultural microfinance? By Möllmann, Johannes; Mußhoff, Oliver; Buchholz, Matthias; Kölle, Wienand
  3. Social groups and credit shocks: Evidence of inequalities in consumption smoothing By Vibhor Saxena; Ishaan Bindal; Philippe LeMay-Boucher
  4. La microfinance et la gestion des risques de vulnérabilité par les ménages ruraux au Sénégal By BIAYE, Abdoulaye; SECK, Massamba Souleymane
  5. L’avènement de la microfinance islamique au Sénégal By SECK, Massamba Souleymane; BIAYE, Abdoulaye

  1. By: Susmita Baulia (University of Turku; University of Turku)
    Abstract: This paper reports a study on decision-making by borrowers regarding take-up of different loan types in a laboratory microfinance experiment setting. I hypothesize that when borrowers are offered a flexible choice of different loan types (here, individual liability (IL) and joint liability (JL)), then they are able to self-select their desirable loan and this could lead to higher overall take-up of loans. I find evidence that loan take-up rate is significantly higher when the choice-set becomes more flexible with additional provision of a second loan type. Further evidence shows that in a setting where moral hazard and free-riding can be eliminated, JL type is more popular among borrowers when both loans are available in the choice-set; this indicates that when borrowers can make sure that partners would not be able to cheat, then JL type could excel in take-up rate. On controlling for risk and selfishness, results suggest that highly risk-averse borrowers mostly stay away from any loan type and prefer safer and unprofitable outside income options. Less selfish borrowers show signs of higher inclination in taking up JL loan, compared to others. Investigating the interaction between discount rate and selfishness, I find that JL is either desirable by those who are selfish yet patient enough to reap the long run benefits of JL loan through its dynamic incentives that reduces the risk of repayment, or by those who are impatient but are less selfish. The results collectively imply that microloan types need to be customized according to the heterogeneous preferences of the borrowers; also, there needs to be enough flexibility in the offered choice-set for better self-selection.
    Keywords: Microloan, Laboratory experiment, Loan take-up, Development policy
    JEL: C90 D81 G21 I38 O21
    Date: 2017–09
  2. By: Möllmann, Johannes; Mußhoff, Oliver; Buchholz, Matthias; Kölle, Wienand
    Abstract: Farmers' vulnerability to adverse weather events, which are likely to increase in frequency and magnitude due to climate change, is a major impediment to a sufficient credit supply. Smallholder farmers' access to credit is, among other factors, crucial for productivity and out-put growth. Index insurance could help lenders to compensate for lacking installment payments in years with severe weather conditions and, thus, is considered to accelerate agricultural lending. Using a unique borrower dataset provided by a Microfinance Institution (MFI) in Madagascar, we analyze whether remotely-sensed vegetation health indices can explain the credit risk of the MFI's agricultural loan portfolio. Therefore, we utilize sequential logit models and quantile regressions. More specifically, we consider the remotely-sensed Vegetation Condition Index, Temperature Condition Index and the Vegetation Health Index as independent variables at the individual branch and the aggregated bank level. These indices are available globally and can potentially enhance the effectiveness of index insurance by reducing basis risk, a major drawback of index insurance. Moreover, we consider loan- and socio-demographic variables of the borrowers as additional independent variables. Our results show that the credit risk of the MFI is explained, to a large extent, by the vegetation health indices. Moreover, the results from quantile regressions show that the explanatory power of the vegetation health indices increases with increasing credit risk. Thus, utilizing remotely-sensed vegetation health indices for index insurance designs might be particularly valuable for MFIs to hedge the credit risk of their agricultural loan portfolio. Facing lower default rates, MFIs could reduce interest rates. Remotely-sensed index insurance could therefore enhance access to credit, contributing to sustainable development in the study region.
    Keywords: Remotely-sensed data,Vegetation Health Indices,Credit risk,Microcredit,Index insurance
    Date: 2019
  3. By: Vibhor Saxena (School of Economics and Finance, University of St Andrews); Ishaan Bindal (National University of Singapore); Philippe LeMay-Boucher (Heriot-Watt University)
    Abstract: A strand of research holds the view that restricting access to credit to regulate over-borrowing can worsen consumers’ financial condition. Another strand of research holds the view that access to credit in the developing countries with subprime credit markets is determined by social groupings and ethnic affiliations. By merging these two strands of research, we investigate the impact of Andhra Pradesh microfinance act (2010) on the consumption expenditure of marginalised social groups and the upper caste Hindu groups in India. We construct an aggregated district level panel data for eight quarters and estimate the impact of unanticipated policy change. The results of our analysis show that the sudden restriction of access to credit has larger impact on the consumption levels of the marginalised social groups: lower castes, tribes, and Muslims. The findings also confirm the failure of contingency policy enacted for smoothing consumption.
    Keywords: financial deleveraging; social insurance; consumption smoothing; microfinance; Andhra Pradesh
    JEL: D12 G2 Z13
    Date: 2019–01–31
  4. By: BIAYE, Abdoulaye; SECK, Massamba Souleymane
    Abstract: The development of microfinance has enabled millions of low-income actors around the world, who did not have access to conventional financing systems, to access financing for their production and / or consumption activities. In Senegal, the activities of Decentralized Financial Systems (DFS) have been growing dynamically for almost three decades (Drs-Sfd, 2018). Thus, the new approach advocated by the microfinance sector has led to a diversification of supply (Labie, 2009) and greater openness to the rural world, but above all to an increase in the overall scope of the financial sector, which is around 20.6%, of which 12.1% is carried by the microfinance sub-sector (ANSD, 2016), driven mainly by the SFDs. The development of financial services in rural areas should result in a better consideration of the needs of actors, particularly households, who often struggle to access quality financial services, meeting their needs, in terms of specificities. And adequate and timely amounts. The latter are often confronted with covariant risks, which make them vulnerable to endogenous and exogenous shocks, the management of which often requires the use of appropriate tools. Thus, this paper aims to analyze, in a detailed way, how rural households use the services offered by the DFS in order to face the risks of vulnerability that they face. The notion of vulnerability refers to the capacity or the incapacity of the actors to be able to prevent shocks, to manage them and to be able to get out of them in case of occurrence of these.
    Keywords: SFD, Vulnerability, Rural World
    JEL: E49 E5 O17 O55
    Date: 2019–02
  5. By: SECK, Massamba Souleymane; BIAYE, Abdoulaye
    Abstract: In Senegal, as elsewhere in the WAEMU zone, access to credit for vulnerable microentrepreneurs is a major concern despite the important role of traditional microfinance institutions. To effectively solve this problem, Islamic microfinance has been identified as an alternative offer, alongside conventional finance, in order to give access to bank accounts to those underprivileged people that have not been sufficiently served by financial institutions. Thus, this article aims to study the advent of Islamic microfinance in Senegal. To do this, our research focuses on the history and role of the State of Senegal in the promotion of Islamic microfinance to finally present the characteristics of this new funding model for vulnerable populations often excluded from the traditional financial system.
    Keywords: Classical microfinance, Islamic microfinance, vulnerable microentrepreneurs
    JEL: G20 G21 G23
    Date: 2019–02

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