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Funding microfinance under asymmetric information

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  • Ghosh, Suman
  • Van Tassel, Eric

Abstract

We consider a model where poverty minimizing donors fund microfinance lenders that are heterogeneous in cost. Under asymmetric information the donors face a choice whether to issue grants or to charge the lenders for funds. While charging for funds leads to higher interest rates, a higher rate can induce separation by squeezing the higher cost lenders. Whether separation is good for aggregate poverty reduction or not depends on the quantity of supply of funds. When the supply is small grants are best, but when the supply is large enough it is better that lenders pay for external funding.

Suggested Citation

  • Ghosh, Suman & Van Tassel, Eric, 2013. "Funding microfinance under asymmetric information," Journal of Development Economics, Elsevier, vol. 101(C), pages 8-15.
    • Handle: RePEc:eee:deveco:v:101:y:2013:i:c:p:8-15
    DOI: 10.1016/j.jdeveco.2012.09.005
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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