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Loan Portfolio Performance and El Niño, an Intervention Analysis

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

Abstract

This paper illustrates that natural disasters such as those created by extreme El Niño can significantly threaten financial institutions serving the poor. The effects of the 1997-98 El Niño on problem loans (restructured loans and those in arrears) is estimated using intervention analysis for a microfinance institution (MFI) in Piura, a region in northern Peru severely affected by El Niño. Extreme El Niño events like those 1982-83 and 1997-98 create catastrophic flooding that destroys transportation infrastructure, disturbs the livelihoods of households engaged in a wide range of activities, and destroys productive assets, crops, and private homes. The purpose of this paper is to assess exposure of a Piura MFI to the consequences associated with an extreme El Niño. Portfolio-level, monthly data from January 1994 to October 2008 were examined using an intervention analysis. While restructured loans averaged 0.5 percent of the total loan portfolio before the 1997-98 El Niño, the estimated cumulative effect of the El Niño indicates that an additional 3.8 percent of the total portfolio value was restructured in a short time period due to this event. No significant effect is found for changes in the proportion of late loans. The analyses demonstrate 1) that the correlated risk exposure of many small borrowers can significantly affect the lender when the catastrophe occurs; 2) the importance of considering bank management in assessing disaster risk to a loan portfolio; and 3) lender strategies to minimize losses may require long-term restructuring that perpetuates the effects of the disaster in the community.

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File URL: http://purl.umn.edu/56217
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Bibliographic Info

Paper provided by Southern Agricultural Economics Association in its series 2010 Annual Meeting, February 6-9, 2010, Orlando, Florida with number 56217.

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Date of creation: 2010
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Handle: RePEc:ags:saea10:56217

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Related research

Keywords: Agricultural Finance; Community/Rural/Urban Development; Financial Economics; International Development; Risk and Uncertainty;

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References

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  1. 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.
  2. Andreas Jobst, 2007. "Operational Risk," IMF Working Papers 07/239, International Monetary Fund.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. 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, February.
  10. 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.
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Cited by:
  1. 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.
  2. Leonardo Becchetti & Stefano Castriota & Pierluigi Conzo, 2012. "Bank Strategies in Catastrophe Settings: Empirical Evidence and Policy Suggestions," CSEF Working Papers 324, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. 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.
  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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