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The impact of demonetization on microfinance institutions

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  • Wu, Wentao
  • Lin, Zhilu
  • Oghazi, Pejvak
  • Patel, Pankaj C.

Abstract

Microfinance institutions (MFIs) must balance financial and social goals. When these coopetitive goals are under threat, which goals do MFIs prefer? Based on the theory of myopic loss aversion, our study aims to assess the immediate effect of the 2016 demonetization in India on MFIs and their loan portfolio performance and on unintended social outcomes. Using the 2016 demonetization in India as a quasi-experiment, we find that MFIs had a lower 30-day and 90-day portfolio at risk (PAR) and implemented better client protection terms. In addition, demonetization had a small but positive effect on developing start-up enterprises and serving more clients below the poverty line. Last, we find that MFIs investing in female client education presented a lower PAR after demonetization. Overall, our study sheds light on the unintended consequences on MFIs as a result of the demonetization event, and it provides policy implications for MFIs.

Suggested Citation

  • Wu, Wentao & Lin, Zhilu & Oghazi, Pejvak & Patel, Pankaj C., 2022. "The impact of demonetization on microfinance institutions," Journal of Business Research, Elsevier, vol. 153(C), pages 1-18.
    • Handle: RePEc:eee:jbrese:v:153:y:2022:i:c:p:1-18
    DOI: 10.1016/j.jbusres.2022.08.009
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    More about this item

    Keywords

    Microfinance; Demonetization; Portfolio at risk (PAR); Loan performance; Social outcomes;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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