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Loan portfolio performance and El Niño, an intervention analysis

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Author Info

  • Benjamin Collier
  • Ani L. Katchova
  • Jerry R. Skees

Abstract

Purpose – This paper illustrates that natural disasters can significantly threaten financial institutions serving the poor. The authors test the case of a microfinance institution (MFI) in Northern Peru, where severe El Niño events create catastrophic flooding. Design/methodology/approach – Portfolio-level, monthly data from January 1994 to October 2008 were examined using an intervention analysis. The paper tested whether the 1997-1998 El Niño increased problem loans and estimated the magnitude of the effect. Findings – The results indicate El Niño significantly increased problem loans, specifically the level of restructured loans. While restructured loans averaged 0.5 percent of the total loan portfolio before the El Niño, the estimated cumulative effect of El Niño indicates that an additional 3.6 percent of the portfolio value was restructured due to this event. Research limitations/implications – Future research could build on these results by modeling insurance-type mechanisms for the MFI. Additional research that replicates these analyses in another context would be highly valuable for comparison across natural disasters and financial institutions. Practical implications – The findings demonstrate that the correlated risk exposure of many small borrowers can significantly affect the lender and the importance of considering bank management in assessing disaster risk of a financial institution. Social implications – Lender strategies to minimize losses may require long-term restructuring that perpetuates the effects of the disaster in the community. Originality/value – This paper may be of particular value to researchers and practitioners hoping to improve the effectiveness and efficiency of MFIs concentrated in regions exposed to natural disaster risk.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

Volume (Year): 71 (2011)
Issue (Month): 1 (May)
Pages: 98-119

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Handle: RePEc:eme:afrpps:v:71:y:2011:i:1:p:98-119

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Related research

Keywords: Financial institutions; Natural disasters; Peru; Portfolio investment;

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References

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  1. Andrew Worthington & Abbas Valadkhani, 2003. "Measuring the impact of natural disasters on capital markets: An empirical application using intervention analysis," School of Economics and Finance Discussion Papers and Working Papers Series 154, School of Economics and Finance, Queensland University of Technology.
  2. Andreas Jobst, 2007. "Operational Risk," IMF Working Papers 07/239, International Monetary Fund.
  3. Jerry R. Skees & Barry J. Barnett, 2006. "Enhancing microfinance using index-based risk-transfer products," Agricultural Finance Review, Emerald Group Publishing, vol. 66(2), pages 235-250, September.
  4. Stephen R. Boucher & Michael R. Carter & Catherine Guirkinger, 2008. "Risk Rationing and Wealth Effects in Credit Markets: Theory and Implications for Agricultural Development," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(2), pages 409-423.
  5. Ortiz, Guillermo, 1983. "Currency Substitution in Mexico: The Dollarization Problem," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 15(2), pages 174-85, May.
  6. Lars Hultkrantz & Christina Olsson, 1997. "Chernobyl effects on domestic and inbound tourism in Sweden — A time series analysis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 9(2), pages 239-258, March.
  7. Hennie Van Greuning & Sonja Brajovic Bratanovic, 2009. "Analyzing Banking Risk : A Framework for Assessing Corporate Governance and Risk Management, Third Edition," World Bank Publications, The World Bank, number 2618, July.
  8. Vitaly Guzhva, 2008. "Applying intervention analysis to financial performance data: The case of US airlines and September 11th," Journal of Economics and Finance, Springer, vol. 32(3), pages 243-259, July.
  9. Jeffrey P. Prestemon & Thomas P. Holmes, 2000. "Timber Price Dynamics Following a Natural Catastrophe," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(1), pages 145-160.
  10. Ani L. Katchova & Peter J. Barry, 2005. "Credit Risk Models and Agricultural Lending," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(1), pages 194-205.
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Citations

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Cited by:
  1. Leonardo Becchetti & Stefano Castriota & Pierluigi Conzo, 2012. "Bank strategies in catastrophe settings: empirical evidence and policy suggestions," CEIS Research Paper 254, Tor Vergata University, CEIS, revised 08 Oct 2012.
  2. Benjamin Collier & Jerry Skees, 2012. "Increasing the resilience of financial intermediaries through portfolio-level insurance against natural disasters," Natural Hazards, International Society for the Prevention and Mitigation of Natural Hazards, vol. 64(1), pages 55-72, October.
  3. Collier, Benjamin, 2013. "Exclusive finance: How unmanaged systemic risk continues to limit financial services for the poor in a booming sector," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150433, Agricultural and Applied Economics Association.
  4. Collier, Benjamin & Skees, Jerry R., 2012. "Increasing the Resilience of Financial Intermediaries through Portfolio-Level Insurance against Natural Disasters," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 125535, International Association of Agricultural Economists.

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