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The trade-off between profitability and outreach in microfinance

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  • Caserta, Maurizio
  • Monteleone, Simona
  • Reito, Francesco

Abstract

The focus of this paper is on the alleged shift of microfinance programs from targeting poor borrowers towards wealthier clients and profitability. In a simple moral-hazard setting, we determine the equilibrium financial contracts offered by a for-profit and a not-for-profit microfinance institution (MFI). We show that: i) with a for-profit MFI, mission drift does not necessarily occur if borrowers are offered a combination of individual and joint liability contracts; ii) with a not-for-profit MFI, poor individuals are never crowded out by wealthier entrepreneurs.

Suggested Citation

  • Caserta, Maurizio & Monteleone, Simona & Reito, Francesco, 2018. "The trade-off between profitability and outreach in microfinance," Economic Modelling, Elsevier, vol. 72(C), pages 31-41.
    • Handle: RePEc:eee:ecmode:v:72:y:2018:i:c:p:31-41
    DOI: 10.1016/j.econmod.2018.01.003
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    Cited by:

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    2. Distefano, Rosaria, 2022. "The social cost of playing by the rules in the credit market," MPRA Paper 115326, University Library of Munich, Germany.
    3. Amon Aniké DEH & Ndeye Paane KHOUMA, 2023. "Financial Performance of Microfinance Institutions in Senegal and Ivory Coast: What are the Determinants? [Performance financière des Institutions de Microfinance au Sénégal et en Côte d’Ivoire : Q," Post-Print hal-04363597, HAL.
    4. Bose, Pinaki & Compton, Ryan A. & Basu, Arnab K., 2020. "Paying for freedom: Indentured labour and strategic default," Economic Modelling, Elsevier, vol. 89(C), pages 502-511.
    5. Girma Jirata Duguma & Jiqin Han, 2018. "Effect of Deposit Mobilization on the Financial Sustainability of Rural Saving and Credit Cooperatives: Evidence from Ethiopia," Sustainability, MDPI, vol. 10(10), pages 1-23, September.
    6. Jiguang Wang & Bing Ran, 2019. "Balancing Paradoxical Missions: How Does Microfinance Rebuild a Sustainable Path in Poverty Alleviation?," SAGE Open, , vol. 9(2), pages 21582440198, June.

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    More about this item

    Keywords

    Microfinance; Outreach; Mission drift;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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