Does regulatory supervision curtail microfinance profitability and outreach ?
AbstractRegulation allows microfinance institutions to evolve more fully into banks, particularly for institutions aiming to take deposits. But there are potential trade-offs. Complying with regulation and supervision can be costly. The authors examine the implications for the institutions’ profitability and their outreach to small-scale borrowers and women. The tests draw on a new database that combines high-quality financial data on 245 of the world’s largest microfinance institutions with newly-constructed data on their prudential supervision. Ordinary least squares regressions show that supervision is negatively associated with profitability. Controlling for the non-random assignment of supervision via treatment effects and instrumental variables regressions, the analysis finds that supervision is associated with substantially larger average loan sizes and less lending to women than in ordinary least squares regressions, although it is not significantly associated with profitability. The pattern is consistent with the notion that profit-oriented microfinance institutions absorb the cost of supervision by curtailing outreach to market segments that tend to be more costly per dollar lent. By contrast, microfinance institutions that rely on non-commercial sources of funding (for example, donations), and thus are less profit-oriented, do not adjust loan sizes or lend less to women when supervised, but their profitability is significantly reduced.
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Bibliographic InfoPaper provided by The World Bank in its series Policy Research Working Paper Series with number 4948.
Date of creation: 01 Jun 2009
Date of revision:
Access to Finance; Debt Markets; Banks&Banking Reform; Economic Theory&Research;
Other versions of this item:
- 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.
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-06-10 (All new papers)
- NEP-DEV-2009-06-10 (Development)
- NEP-MFD-2009-06-10 (Microfinance)
- NEP-REG-2009-06-10 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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