The effect of agriculture on repayment efficiency: a look at MFI borrowing groups

There is a widely held industry assumption from microfinance institutions that agricultural loans have poorer repayment rates, which has resulted in many loans being provided for small businesses as opposed to agricultural purposes. Using data from a sample of 100 borrowing groups from a south Indian Microfinance Institutions (MFI), this study challenges this belief by analyzing the repayment efficiency of borrowing groups and reflects on the implications for agricultural microfinance loans. The analysis is run using Bayesian stochastic frontier estimation with an exponential hierarchical prior on the efficiency term. Our results indicate that the average efficiency of the borrowing groups analyzed was approximately 75% and that having a higher percentage of agricultural loans increased borrowing group efficiency while gains in efficiency also rose as the size of the borrowing group increases.