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Does regulatory supervision curtail microfinance profitability and outreach ?

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  • Cull , Robert
  • Demirguc-Kunt , Asli
  • Morduch, Jonathan

Abstract

Regulation 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 Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4948.

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Date of creation: 01 Jun 2009
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Handle: RePEc:wbk:wbrwps:4948

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Keywords: Access to Finance; Debt Markets; Banks&Banking Reform; Economic Theory&Research;

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References

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  1. Robert Cull & Asli Demirgüç-Kunt & Jonathan Morduch, 2009. "Microfinance Meets the Market," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 167-92, Winter.
  2. Suresh de Mel & David McKenzie & Christopher Woodruff, 2008. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1329-1372, November.
  3. Hartarska, Valentina M., 2005. "Governance and Performance of Microfinance Institutions in Central and Eastern Europe and the Newly Independent States," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24568, European Association of Agricultural Economists.
  4. David McKenzie & Christopher Woodruff, 2008. "Experimental Evidence on Returns to Capital and Access to Finance in Mexico," World Bank Economic Review, World Bank Group, vol. 22(3), pages 457-482, November.
  5. Mersland, Roy & Øystein Strøm, R., 2009. "Performance and governance in microfinance institutions," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 662-669, April.
  6. Robert Cull & Asli Demirguç-Kunt & Jonathan Morduch, 2007. "Financial performance and outreach: a global analysis of leading microbanks," Economic Journal, Royal Economic Society, vol. 117(517), pages F107-F133, 02.
  7. Frederick J. Schroeder, 1985. "Compliance costs and consumer benefits of the electronic fund transfer act : recent survey evidence," Staff Studies 143, Board of Governors of the Federal Reserve System (U.S.).
  8. Hartarska, Valentina, 2005. "Governance and performance of microfinance institutions in Central and Eastern Europe and the Newly Independent States," World Development, Elsevier, vol. 33(10), pages 1627-1643, October.
  9. Valentina Hartarska & Denis Nadolnyak, 2007. "Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence," Applied Economics, Taylor and Francis Journals, vol. 39(10), pages 1207-1222.
  10. Gregory Elliehausen, 1998. "The cost of banking regulation: a review of the evidence," Staff Studies 171, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Cull, Robert & Demirguc-Kunt, Asli & Morduch, Jonathan, 2009. "Banks and microbanks," Policy Research Working Paper Series 5078, The World Bank.
  2. Inter-American Development Bank (IDB), 2010. "Guidelines of Principles for Effective Regulation and Supervision of Microfinance Operations," IDB Publications 39178, Inter-American Development Bank.

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