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Agent-Based Mapping of Credit Risk for Sustainable Microfinance

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  • Joung-Hun Lee
  • Marko Jusup
  • Boris Podobnik
  • Yoh Iwasa

Abstract

By drawing analogies with independent research areas, we propose an unorthodox framework for mapping microfinance credit risk---a major obstacle to the sustainability of lenders outreaching to the poor. Specifically, using the elements of network theory, we constructed an agent-based model that obeys the stylized rules of microfinance industry. We found that in a deteriorating economic environment confounded with adverse selection, a form of latent moral hazard may cause a regime shift from a high to a low loan payment probability. An after-the-fact recovery, when possible, required the economic environment to improve beyond that which led to the shift in the first place. These findings suggest a small set of measurable quantities for mapping microfinance credit risk and, consequently, for balancing the requirements to reasonably price loans and to operate on a fully self-financed basis. We illustrate how the proposed mapping works using a 10-year monthly data set from one of the best-known microfinance representatives, Grameen Bank in Bangladesh. Finally, we discuss an entirely new perspective for managing microfinance credit risk based on enticing spontaneous cooperation by building social capital.

Suggested Citation

  • Joung-Hun Lee & Marko Jusup & Boris Podobnik & Yoh Iwasa, 2015. "Agent-Based Mapping of Credit Risk for Sustainable Microfinance," PLOS ONE, Public Library of Science, vol. 10(5), pages 1-16, May.
  • Handle: RePEc:plo:pone00:0126447
    DOI: 10.1371/journal.pone.0126447
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    References listed on IDEAS

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    1. Boris Podobnik & Marko Jusup & Dejan Kovac & H. E. Stanley, 2017. "Predicting the Rise of EU Right-Wing Populism in Response to Unbalanced Immigration," Complexity, Hindawi, vol. 2017, pages 1-12, August.

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