Financial performance and outreach : a global analysis of leading microbanks
AbstractMicrofinance contracts have proven able to secure high rates of loan repayment in the face of limited liability and information asymmetries, but high repayment rates have not translated easily into profits for most microbanks. Profitability, though, is at the heart of the promise that microfinance can deliver poverty reduction while not relying on ongoing subsidy. The authors examine why this promise remains unmet for most institutions. Using a data set with unusually high quality financial information on 124 institutions in 49 countries, they explore the patterns of profitability, loan repayment, and cost reduction. The authors find that institutional design and orientation matter substantially. Lenders that do not use group-based methods to overcome incentive problems experience weaker portfolio quality and lower profit rates when interest rates are raised substantially. For these individual-based lenders, one key to achieving profitability is investing more heavily in staff costs-a finding consistent with the economics of information but contrary to the conventional wisdom that profitability is largely a function of minimizing cost.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 3827.
Date of creation: 01 Feb 2006
Date of revision:
Banks&Banking Reform; Economic Theory&Research; Economic Adjustment and Lending; Investment and Investment Climate; Rural Finance;
Other versions of this item:
- Robert Cull & Asli DemirguÃ§-Kunt & Jonathan Morduch, 2007. "Financial performance and outreach: a global analysis of leading microbanks," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 117(517), pages F107-F133, 02.
- NEP-ALL-2006-01-29 (All new papers)
- NEP-CFN-2006-01-29 (Corporate Finance)
- NEP-DEV-2006-01-29 (Development)
- NEP-FMK-2006-01-29 (Financial Markets)
- NEP-MFD-2006-01-29 (Microfinance)
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