Microfinance,the long tail and mission drift

Poor people were excluded from financial services until microfinance institutions (MFIs) emerged. The mission of MFIs is to alleviate poverty, contributing to women empowerment, especially in rural communities. Microcredits can be analyzed under Pareto's 80/20 Principle. Their clients are situated in the long tail of the wealth distribution function. This niche market is not very attractive, because of its high administrative costs, lack of deposits and the need for compensating low revenues with fluctuating subsidies. Some MFIs have drifted from their mission. This paper presents a model to explain microfinance mission drift, tested with hypotheses. The results from the empirical study show a pattern of mission centered MFI: a small NGO, with labor productivity, receiving donations and obtaining a high yield. It can be concluded that there is a need for reducing interest rates. According to the long tail theory, this could be done by using efficient technology, as it has been achieved in the e-commerce sector.     

Doing good and doing business at the bottom of the pyramid

There is an ongoing debate among scholars regarding the existence of a fortune at the bottom of the income pyramid. While some scholars argue that there is a profitable market at the pyramid base, others refute this proposition, arguing that targeting poor people as customers could lead to unethical business practices and further their exploitation. With the aid of mini cases, this article explains that there is indeed a fortune to be made at the base of the pyramid but that good fortune can be created for both corporations and poor people if the population at the bottom of the pyramid is treated as suppliers, producers, co-owners, and/or employees rather than as mere consumers. However, in terms of consumers, there is a market for firms at the base of the pyramid through which they can earn profits and simultaneously help eradicate poverty, mainly by lowering the cost structure for poor people. In other words, firms that can reduce poverty and provide cost-effective utilitarian goods and services to poor people have more to gain from such individuals than those firms that provide more luxurious goods and services or offer goods with mere aesthetic or emotional value. With the help of mini cases, this article explains four measures firms can use to create fortunes for themselves as well as for poor customers by avoiding affordability and adaptability traps.     

Exploring the effect of gender diversity in MFIs during turbulent periods

Abstract

Gender diversity is generally recognized as relevant in microfinance, and the relationship between gender diversity and firms’ performance has received attention in academic literature. The above-mentioned relationship has not been addressed until now in the microfinance industry specifically. This study seeks to explain the role played by gender diversity in the workforce of microfinance institutions (MFIs) during turbulent periods in the firms’ performance. The study analyses data from 555 ratings of 185 MFIs from MicroFinanza Rating, a leading microfinance rating agency. The analysis shows that the number of women on the staff of MFIs is significantly and positively associated with both the Return on Equity and Operational Self-Sufficiency of MFIs, indicating a positive impact of gender diversity on firms’ performance.     

微型金融的普惠效应实证研究——基于6省4220户农户调查数据

本文利用全国6个省份60县4220户农户的调查数据,运用Probit模型实证检验微型金融机构的普惠效应,即小额信贷是否为中低收入和贫困农户提供信贷支持以及能否利用自身特殊的贷款机制拓展农村金融的覆盖面.实证结果发现,微型金融机构能够将信贷服务向正规金融机构无法覆盖的中等收入群体延伸,其普惠效应主要源自其依托现金流为核心...     

‘Freedom from Poverty is Not for Free’: Rural Development and the Microfinance Crisis in Andhra Pradesh,India

Within neoliberal development discourse, the poor are represented as entrepreneurial subjects for whom integration into formalized financial systems can facilitate their escape from poverty. This paper examines how the 2010 microfinance crisis in Andhra Pradesh reveals significant fault lines that underlie this narrative. It argues that the crisis of microfinance in Andhra Pradesh needs to be placed within the context of severe agrarian dislocations stemming from the impact of trade liberalization, drought cycles and a transformation of rural social relations. The contradictions are most strikingly represented in increasing rural differentiation and a generalized crisis of social reproduction among land‐poor farmers and landless labourers. A massive influx of microfinance – driven by both state‐operated programmes and private‐sector institutions leveraged with cross‐border financial flows – found a ready clientele among various agrarian classes seeking to bolster consumption and roll over debt in conditions of significant uncertainty and distress. Yet in banking on this vulnerability, microfinance institutions socialized the contradictions of rural Andhra Pradesh and have ultimately been thrown into limbo through the unleashing of political and social forces unforeseen in neoliberal narratives of agrarian change.     

Do women borrowers augment financial performance of MFIs?

There is some consensus that depth of outreach and financial performance of Microfinance Institutions (MFI) are positively correlated. A majority of microcredit borrowers are women and since the prevalence of female borrowers is even greater among the very poor, there should be a positive correlation between female borrowers and financial performance. Most of the MFIs target women as preferred borrowers. However, no study to date has investigated the relationship between targeting women and MFI’s sustainability with respect to profitability and yield. Utilizing a panel of 892 MFIs over a period of 10 years, this study shows that increased proportion of women borrowers has a statistically significant positive impact on yield and financial performance of MFIs. Consequently, this article also analyses the implication as to whether female borrowers have better repayment rate than male borrowers.     

The macroeconomy and microfinance outreach: a panel data analysis

This study examines the effects of macroeconomic and institutional factors on microfinance institution (MFI) outreach. To capture the performance of the macroeconomy, we include proxies for institutional quality, economic growth, FDI inflow, unemployment rate, inflation and the prevalence of wage-earning jobs. Further, we examine effects on outreach along the dimensions of outreach depth and outreach breadth. Using data on 1526 MFIs from 99 countries over the period 2000 to 2015, our results suggest that environments characterised by high levels of economic performance and good institutions tend to hinder outreach performance. These results suggest that MFIs depend on a poor economy to thrive given the informal nature of microfinance.     

Do microfinance institutions fulfil their promise? Evidence from cross-country data

The concept of microfinance promises poverty reduction and economic growth. We empirically challenge this economic and social promise in an attempt to prove its fulfilment. Our multivariate regressions of economic development variables such as per capita gross national income based on PPP converted to international dollars (GNI per capita PPP), GDP growth, as well as gross capital formation and labour participation rate against specific microfinance institutions’ (MFI) variables show that the success and performance of MFIs significantly influence economic development. Microfinance directly influences economic growth through the value that MFI performance adds to purchasing power. An indirect impact comes from an improvement in capital accumulation and employment rates. These insights are valuable as the interdependencies between microfinance and economic development that this article verifies offer new and progressive insights into purposeful action that can be taken to stimulate economic development and growth. Targeted development programmes as well as socially responsible investments can be applied in developing economies in order to strengthen their growth and alleviate poverty.     

Exploring the mismatch between credit ratings and loss-given-default: A credit risk approach

It is commonly observed that high grade loans with better ratings are often associated with low recoveries if they default (i.e. with relatively high loss-given-default (LGD)). To address the mismatch problem, this paper proposes a credit risk approach by minimizing LGD for higher rated loans as a risk-rating matching standard in the sense that the decreasing LGD from creditors’ perspective is associated with higher credit rating for the borrower. This standard forces customers’ credit rating of each grade to be optimally determined in correspondence to its LGD, which means the LGD of high grade loans tends to be low. The approach is then tested using three credit datasets from China, i.e. credit data from 2044 farmers, 2157 small private businesses and 3111 SMEs. The empirical results show that the proposed approach indeed guides the way to solve the mismatch phenomenon between credit ratings and LGDs in the existing credit rating literature. By optimally determining credit ratings, the findings derived from this paper help provide a valuable reference for bankers, and bond investors to manage their credit risk.