| By: |
Morduch, Jonathan;
Demirguc-Kunt, Asli;
Cull, Robert |
| Abstract: |
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. |
| Keywords: |
Banks & Banking Reform,Economic Theory & Research,Economic Adjustment and Lending,Investment and Investment Climate,Rural Finance |
| Date: |
2006–02–01 |
| URL: |
http://d.repec.org/n?u=RePEc:wbk:wbrwps:3827&r=mfd |