nep-mfd New Economics Papers
on Microfinance
Issue of 2020‒07‒27
four papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Flexible Microcredit: Effects on Loan Repayment and Social Pressure By Kristina Czura; Anett John; Lisa Spantig
  2. Does the Pursuit of Outreach Consistently Stifle the Financial Performance of Microfinance Institutions in sub-Saharan Africa? By Sydney Chikalipah
  3. Incentives and Performance of Agents in a Microfinance Bank By Surajeet Chakravarty; Sumedh Dalwai; Pradeep Kumar
  4. Do Rural Banks Matter That Much? Burgess and Pande (AER, 2005) Reconsidered By Nino Buliskeria; Jaromir Baxa

  1. By: Kristina Czura; Anett John; Lisa Spantig
    Abstract: Flexible repayment schedules allow borrowers to invest in profitable yet risky projects, but practitioners fear they erode repayment morale. We study repayment choices in rigid and flexible loan contracts that allow discretion in repayment timing. To separate strategic repayment choices from repayment capacity given income shocks, we conduct a lab-in-the-field experiment with microcredit borrowers in the Philippines. Our design allows us to observe social pressure, which is considered both central to group lending, and excessive in practice. In our rigid benchmark contract, repayment is much higher than predicted under simple payoff maximization. Flexibility reduces high social pressure, but comes at the cost of reduced loan repayment. We present theoretical and empirical evidence consistent with a strong social norm for repayment, which is weakened by the introduction of flexibility. Our results imply that cooperative behavior determined by social norms may erode if the applicability of these norms is not straightforward.
    Keywords: peer punishment, social norms, microfinance, flexible repayment
    JEL: O16 D90 G21
    Date: 2020
  2. By: Sydney Chikalipah
    Abstract: We study the relationship between outreach and the financial performance of 479 microfinance institutions (MFIs) in 37 countries of sub-Saharan African (SSA), covering the period 1998 to 2012. This study builds on earlier literature on the relationship between outreach and the financial performance of MFIs across countries. Unlike many prior microfinance studies, we investigate the outreach-financial performance nexus by adopting novel approaches: (i) of linear and non-linear specification, (ii) of solely focusing on SSA, and (iii) of segregating the two-outreach variables into different segments, with the aim of determining the optimal outreach thresholds (or tipping point). By employing the OLS and GMM method, we find evidence indicating a positive and statistically significant relationship between outreach and the financial performance among MFIs in SSA. In addition, providing small microcredits below the USD 600 threshold is associated with lower profitability than larger loans. Equally, we observed that MFIs serving more than 30,000 clients reported a strong financial performance, rather than the MFIs that were serving less than that threshold. The study findings have implications for the managers and stakeholders with a vested interest in the microfinance industry of SSA.
    Keywords: Microfinance, Outreach, Profitability and sub-Saharan Africa
    JEL: C32 G21 O12 O16 O55
    Date: 2020–03
  3. By: Surajeet Chakravarty (University of Exeter); Sumedh Dalwai (University of Exeter); Pradeep Kumar (University of Exeter)
    Abstract: An important aspect of providing credit to the poor is the mechanism adopted by the credit institutions to do so. Most microfinance banks use field agents to acquire new borrowers, manage the account and collect repayments. How does the supply of credit change with a change in incentives provided to such field agents? Mann Deshi Bank, a microfinance bank in India, changed its remuneration scheme from a pure commission based to a mixed scheme with a combination of a base salary and other incentives. This paper examines the effect it had on the effort and the performance of the agents by using a rich panel data on the bankÕs joint liability lending product. The results show that the change in the contract form with a large flat wage and reduced incentives improved performance of the agents in terms of the quantity (increase in the number of borrowers acquired) and quality (the borrowers acquired had fewer delays in repayments). We find evidence of mixed contract agents exerting significantly more effort than the pure commission agents to ascertain borrower quality.
    Keywords: Micro-finance institutions, joint liability loans, labor contracts, moral hazard
    JEL: G21 O12 J41
    Date: 2020
  4. By: Nino Buliskeria (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic); Jaromir Baxa (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic; bThe Czech Academy of Sciences, Institute of Information Theory and Automation, Pod Vodarenskou Vezi 4, 182 00, Prague, Czech Republic)
    Abstract: We replicate Burgess and Pande (2005), who analyze the effects of the state-led expansion of the banking sector on poverty in India from 1961 to 1990. They find that the bank branch expansion in the rural areas decreased poverty due to improved access to credit and saving facilities. However, Burgess and Pande (2005) do not consider other simultaneous policies affecting the financial sector and poverty, in particular, the Integrated Rural Development Program aiming at credit subsidizing for the poor. Therefore, using the methodology by Burgess and Pande (2005), we show that structural shifts in the rural bank branch expansion and rural poverty can be identified for almost any other year between 1970 and 1984. Our results imply that the experiment by Burgess and Pande (2005) does not prove a superior impact of the bank branch expansion on poverty reduction in India.
    Keywords: Bank expansion, rural poverty, finance
    JEL: G21 G28 O15 O16
    Date: 2020–05

This nep-mfd issue is ©2020 by Aastha Pudasainee and 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.
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