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Regulation and supervision of microfinance institutions: an example of cooperative credit society

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  • FOUNANOU, Mathurin/M
  • RATSIMALAHELO, Zaka/Z

Abstract

We study the optimal regulation of a cooperative credit society which has private information on the intrinsic quality of its loan portfolio (adverse selection) and where the cooperative’s choice of effort to improve this quality cannot be observed by the regulator (moral hazard). We characterize the optimal contracts offered by the regulator to the credit cooperatives. We have been able to show that the optimal contracts depend on 3 main factors namely: on the accuracy of the supervisor’s signal, the likelihood of facing a high quality credit cooperative, and the cost of supervision.

Suggested Citation

  • FOUNANOU, Mathurin/M & RATSIMALAHELO, Zaka/Z, 2012. "Regulation and supervision of microfinance institutions: an example of cooperative credit society," MPRA Paper 39581, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:39581
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    References listed on IDEAS

    as
    1. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    2. Robert Cull & Asli Demirgüç-Kunt & Jonathan Morduch, 2009. "Microfinance Meets the Market," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 167-192, Winter.
    3. Cull, Robert & Demirgüç-Kunt, Asli & Morduch, Jonathan, 2011. "Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?," World Development, Elsevier, vol. 39(6), pages 949-965, June.
    4. Tito Cordella & Eduardo Levy Yeyati, 1998. "Public Disclosure and Bank Failures," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 110-131, March.
    5. van Greuning, Hennie & Gallardo, Joselito & Randhawa, Bikki, 1999. "A framework for regulating microfinance institutions," Policy Research Working Paper Series 2061, The World Bank.
    6. Valentina Hartarska & Denis Nadolnyak, 2007. "Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence," Applied Economics, Taylor & Francis Journals, vol. 39(10), pages 1207-1222.
    7. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Microfinance; Informational asymmetry; optimal incentive contract; regulation; supervision;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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