MICROFINANCE PAPER WRAP-UP: Microfinance Tradeoffs: Regulation, Competition, and Financing, by Robert Cull, Asli Demirgüç-Kunt & Jonathan Morduch

Written by Robert Cull, Asli Demirgüç-Kunt and Jonathan Morduch, Published by the Financial Access Initiative in September 2009, 24 pages, available at: http://financialaccess.org/sites/default/files/FAI_Microfinance_Tradeoffs.pdf

Using evidence from global surveys on microfinance institutions (MFIs), the authors examine the trade-offs between “meeting social goals and maximizing financial performance.” The authors mainly use 2005 data from the Microfinance Information Exchange’s “MicroBanking Bulletin” [1]. This study covers the broad topics of contracts, commercialization, regulation, and competition. The authors started with a dataset on 124 MFIs in 49 countries and, after incorporating “additional observations, data, and variables,” the authors increased their sample to, at largest, 346 MFIs in 67 countries.

The main results are as follows:
Contracts:
The authors find that “financially self-sustainable individual lenders tend to lend to both relatively poorer clients and more women.” This is an affirmation that MFIs seem to be achieving the “depth of outreach” goal traditionally associated with the microfinance industry. Additionally, the data shows that loan repayment rates generally decrease as interest rates increase, except in the case of group lenders and village banks, thus displaying the effectiveness of group loans in providing an alternative form of collateral. Furthermore, serving a poorer clientele is correlated with higher average costs, but proportionally higher interest rates prevent these costs from lessening profits. Lastly, larger and older institutions are less likely to achieve simultaneous profitability and deep outreach.

Commercialization:
Of the MFIs listed in the “MicroBanking Bulletin,” 45 percent are non-governmental organizations (NGOs), accounting for 51 percent of borrowers, and 61 percent of subsidies go to these NGOs. Over half of the MFIs in the sample are profitable, though commercial MFIs are more likely to be profitable than NGOs. Additionally, commercial MFIs have loan sizes that are four times larger that NGOs, and NGOs charge interest rates that are two times as large as commercial MFIs. However, both commercial and NGO MFIs generally have high repayment rates (“30-day portfolio at risk below 4% at the median”).

Regulation:
Generally speaking, MFIs that face “rigorous and regular supervision” from regulating authorities reap similar profits to those that do not. This could be explained by the fact that regulated MFIs are more likely to have deposit-taking licenses, and therefore have an additional source of financing to cover costs. However, heavily supervised MFIs have higher loan sizes and lend less to women than those that are not heavily supervised.

Competition:
The authors find that “greater bank penetration in the overall economy” is associated with MFIs providing smaller loans and more loans to women. But, this increased depth of outreach has little effect on the profitability of these MFIs. This is yet another indicator that profitability and depth of outreach do not have to be mutually exclusive.

By Christopher Maggio, Research Assistant

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