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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
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    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.

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    File URL: http://mpra.ub.uni-muenchen.de/39581/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 39581.

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    Date of creation: Mar 2012
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    Handle: RePEc:pra:mprapa:39581

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    Keywords: Microfinance; Informational asymmetry; optimal incentive contract; regulation; supervision;

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    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 614-41, June.
    2. Eduardo Levy Yeyati & Tito Cordella, 1997. "Public Disclosure and Bank Failures," IMF Working Papers 97/96, International Monetary Fund.
    3. 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.
    4. 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.
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