nep-mfd New Economics Papers
on Microfinance
Issue of 2022‒03‒28
five papers chosen by
Aastha Pudasainee and Olivier Dagnelie

  1. Contractual Restrictions and Debt Traps By Ernest Liu; Benjamin N. Roth
  2. Microfinance institution and moneylenders in a segmented rural credit market By Abhirupa Das; Uday Bhanu Sinha
  3. Relative Performance Contracts versus Group Contracts with Hidden Savings By Archawa Paweenawat
  4. The Changing Role of Banks in the Financial System: Social versus Conventional Banks By Simon Cornée; Anastasia Cozarenco; Ariane Szafarz
  5. Contingent Relations Between Microcredit and Entrepreneurial Re-Engagement in Traditional Rural Contexts: An Exploration of the Case of Peasants From Madagascar By Patrick Valeau; Cousin Germain Ravonjiarison

  1. By: Ernest Liu (Princeton University); Benjamin N. Roth (Harvard University)
    Abstract: Microcredit and other forms of small-scale finance have failed to catalyze entrepreneurship in developing countries. In these credit markets, borrowers and lenders often bargain over not only the interest rate but also implicit restrictions on types of investment. We build a dynamic model of informal lending and show this may lead to endogenous debt traps. Lenders constrain business growth for poor borrowers yet richer borrowers may grow their businesses faster than they could have without credit. The theory offers nuanced comparative statics and rationalizes the low average impact and low demand of microfinance despite its high impact on larger businesses.
    Keywords: credit markets, developing countries
    JEL: E51 O12
    Date: 2020–07
  2. By: Abhirupa Das (Department of Economics, Delhi School of Economics); Uday Bhanu Sinha (Department of Economics, Delhi School of Economics)
    Abstract: The poor heavily rely on informal sources for their capital needs as they lack collateral required by formal institutions. Furthermore, local moneylenders operate in distinct market segments and borrowing opportunities may not be equal for every household.The role of a microfinance institution (MFI) operating in such environment becomes even more crucial. The effectiveness of MFIs in rescuing poor borrowers from ‘clutches of’ moneylenders has been a much-debated topic over the last few decades. This paper attempts to contribute to this debate by presenting a model of competition between a socially motivated MFI and profit-maximising moneylenders in the presence of marketsegmentation. We characterise equilibrium conditions in the presence of market segmentation under scenarios where only moneylenders operate, only MFI operates and finally the case where both co-exist. We find unambiguous benefits arising from the entry of a welfare maximising entity such as an MFI. We also see the values of having local agents like moneylenders on the ground who have information gathering advantages. We conclude that an effective system of both these entities working together can bring about increases in efficiency and welfare. Key Words: microfinance, market segmentation, collateral substitution, mandatory savings, information asymmetry, moral hazard, adverse selection JEL Codes: D82, O16
    Date: 2022–03
  3. By: Archawa Paweenawat
    Abstract: This paper studies the effects of hidden savings on the relative benefits of two optimal incentive contracts, namely, relative performance contracts and group contracts. As an analysis framework, this paper develops a dynamic moral hazard model in which agents can secretly save. The results from the model suggest that hidden savings affect relative performance contracts more than they affect group contracts. In addition, under group contracts, agents rely more on risk-sharing networks and less on own savings than they do under relative performance contracts. To test the model’s predictions, this paper uses a unique data set with detailed information on households’ characteristics, their choices of loans, and their responses to liquidity shocks. The empirical results confirm that, in the areas where hidden savings problem is likely to be more severe, households are more likely to choose group loans. In addition, the results also show that households with group loans rely more on networks to prevent themselves from future liquidity shocks.
    Keywords: Incentive contracts; Unobserved savings; Relative performance; Group lending; Microfinance
    JEL: D86 G21 G51
    Date: 2022–03
  4. By: Simon Cornée (Univ Rennes, CNRS, CREM - UMR 6211, F-35000 Rennes, France ; Center for European Research in Microfinance (CERMi), France); Anastasia Cozarenco (Montpellier Business School and CERMi, France); Ariane Szafarz (Université Libre de Bruxelles (ULB), SBS-EM, CEBRIG and CERMi, Belgium)
    Abstract: Social banks have emerged as a new group of banks that call themselves as “alternative”, “ethical”, “sustainable”, and “value-based”. Their small market share increases at a rapid pace and is still expected to grow in the future. Social banks are institutions with both (at least some) activities of financial intermediation and one or several non-financial missions, typically based on environmental and social values. By unpacking the observable, real-life differences between social banks and conventional banks, this chapter paves the way to theorizing the multidimensional characteristics of social banks within the global banking industry. Business models, governance issues, lending technologies; and social outcomes appear to be key aspects to understand how innovative, value-based, social banks work and how they might one day substantively affect mainstream banking business.
    Keywords: Social banks, ethical banks, social mission, financial cooperatives, microcredit
    JEL: G21 B55 H23 G32 G28 H81
    Date: 2022–02
  5. By: Patrick Valeau (UR1 - Université de Rennes 1 - UNIV-RENNES - Université de Rennes); Cousin Germain Ravonjiarison
    Abstract: A travers l'étude exploratoire des parcours de quinze paysans malgaches ayant bénéficié de plusieurs microcrédits, nous questionnons les relations possibles entre ce dispositif et le réengagement entrepreneurial des bénéficiaires dans le cadre de très petites entreprises agricoles au sein de sociétés rurales traditionnelles. Transposant le modèle établi par Valéau (2007) à ce contexte, nous focalisons notre attention sur les dimensions psychologiques de ce processus. Nous examinons tout d'abord les doutes et les contradictions liées aux conditions de vie, mais aussi à un contexte traditionnel rural où l'innovation n'est pas la norme. Nos résultats montrent qu'à partir de conditions relativement similaires, les individus rencontrés se différencient progressivement les uns des autres au regard de leur réengagement entrepreneurial et, ce faisant, des stratégies et des performances de leur très petite entreprise. Nous identifions trois formes de réengagements tour à tour fondés sur la subsistance, la diversification et la croissance. Différentes pistes pour de futures recherches et des implications pratiques en matière de sélection et d'accompagnement des bénéficiaires sont discutées en opposant à un point de vue exclusivement commercial, des approches sociales et solidaires.
    Date: 2021

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