The Economic Journal · 2007 · 995 citations · 15 references
Social SciencesBusiness EconomicsEconomicsBankingFinancial EconomicsMicroeconomicsMicrofinanceMicrofinance InstitutionsFinancial Performance ManagementIncentive MechanismsIncentive ProvisionLimited Liability ConstraintsLoan Portfolio QualityLoan Repayment AnalysisPoverty Reduction ImpactProfit Rate
Microfinance contracts achieve high loan repayment rates yet rarely translate into profits, despite profitability being essential for poverty reduction without subsidies. The study investigates why most microbanks fail to realize this profitability promise. Using high‑quality financial data from 124 institutions across 49 countries, the authors analyze profitability, repayment patterns, and cost‑reduction strategies. They find that institutional design matters: group‑based lenders enjoy better portfolio quality and higher profits when rates rise, while individual‑based lenders must invest more in staff costs to achieve profitability, challenging the cost‑minimization norm.
Microfinance contracts have proven able to secure high rates of loan repayment in the face of limited liability and information asymmetries, but high repayment rates have not translated easily into profits for most microbanks. Profitability, though, is at the heart of the promise that microfinance can deliver poverty reduction while not relying on ongoing subsidy. The authors examine why this promise remains unmet for most institutions. Using a data set with unusually high quality financial information on 124 institutions in 49 countries, they explore the patterns of profitability, loan repayment, and cost reduction. The authors find that institutional design and orientation matter substantially. Lenders that do not use group-based methods to overcome incentive problems experience weaker portfolio quality and lower profit rates when interest rates are raised substantially. For these individual-based lenders, one key to achieving profitability is investing more heavily in staff costs-a finding consistent with the economics of information but contrary to the conventional wisdom that profitability is largely a function of minimizing cost.
15
Credit Rationing in Markets with Imperfect Information
Joseph E. Stiglitz, Andrew Weiss · American Economic Review · 1981 · 12.9K citations · Full text
Handbook of development economics
Jaime de Mélo · Journal of Development Economics · 1992 · 1.7K citations
Choice Reviews Online · 2006 · 1.3K citations
Peer Monitoring and Credit Markets
Joseph E. Stiglitz · The World Bank Economic Review · 1990 · 1.3K citations · Full text
Group lending, repayment incentives and social collateral
Timothy Besley, Stephen Coate · Journal of Development Economics · 1995 · 1.2K citations · Full text
Management, Economics, Finance +13