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Loan portfolio performance and El Niño, an intervention analysis

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  • Benjamin Collier
  • Ani L. Katchova
  • Jerry R. Skees

Abstract

Purpose - This paper illustrates that natural disasters can significantly threaten financial institutions serving the poor. The authors test the case of a microfinance institution (MFI) in Northern Peru, where severe El Niño events create catastrophic flooding. Design/methodology/approach - Portfolio‐level, monthly data from January 1994 to October 2008 were examined using an intervention analysis. The paper tested whether the 1997‐1998 El Niño increased problem loans and estimated the magnitude of the effect. Findings - The results indicate El Niño significantly increased problem loans, specifically the level of restructured loans. While restructured loans averaged 0.5 percent of the total loan portfolio before the El Niño, the estimated cumulative effect of El Niño indicates that an additional 3.6 percent of the portfolio value was restructured due to this event. Research limitations/implications - Future research could build on these results by modeling insurance‐type mechanisms for the MFI. Additional research that replicates these analyses in another context would be highly valuable for comparison across natural disasters and financial institutions. Practical implications - The findings demonstrate that the correlated risk exposure of many small borrowers can significantly affect the lender and the importance of considering bank management in assessing disaster risk of a financial institution. Social implications - Lender strategies to minimize losses may require long‐term restructuring that perpetuates the effects of the disaster in the community. Originality/value - This paper may be of particular value to researchers and practitioners hoping to improve the effectiveness and efficiency of MFIs concentrated in regions exposed to natural disaster risk.

Suggested Citation

  • Benjamin Collier & Ani L. Katchova & Jerry R. Skees, 2011. "Loan portfolio performance and El Niño, an intervention analysis," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 71(1), pages 98-119, May.
    • Handle: RePEc:eme:afrpps:v:71:y:2011:i:1:p:98-119
    DOI: 10.1108/00021461111128183
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    Cited by:

    1. Ulf Römer & Oliver Musshoff, 2017. "Can agricultural credit scoring for microfinance institutions be implemented and improved by weather data?," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 78(1), pages 83-97, December.
    2. Leonardo Becchetti & Stefano Castriota & Pierluigi Conzo, 2012. "Bank strategies in catastrophe settings: empirical evidence and policy suggestions," Econometica Working Papers wp43, Econometica.
    3. Turvey, C. G., 2017. "IFAD RESEARCH SERIES 10 - Inclusive finance and inclusive rural transformation," IFAD Research Series 280048, International Fund for Agricultural Development (IFAD).
    4. Frederick Murdoch Quaye & Denis Nadolnyak & Valentina Hartarska, 2017. "Factors Affecting Farm Loan Delinquency in the Southeast," Research in Applied Economics, Macrothink Institute, vol. 9(4), pages 75-92, December.
    5. Jesse B. Tack & David Ubilava, 2015. "Climate and agricultural risk: measuring the effect of ENSO on U.S. crop insurance," Agricultural Economics, International Association of Agricultural Economists, vol. 46(2), pages 245-257, March.
    6. Anita Mukherjee & Shawn Cole & Jeremy Tobacman, 2021. "Targeting weather insurance markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(3), pages 757-784, September.
    7. Bob Ssekiziyivu & Rogers Mwesigwa & Mayengo Joseph & Isaac Nkote Nabeta, 2017. "Credit allocation, risk management and loan portfolio performance of MFIs—A case of Ugandan firms," Cogent Business & Management, Taylor & Francis Journals, vol. 4(1), pages 1374921-137, January.
    8. Brei, Michael & Mohan, Preeya & Strobl, Eric, 2019. "The impact of natural disasters on the banking sector: Evidence from hurricane strikes in the Caribbean," The Quarterly Review of Economics and Finance, Elsevier, vol. 72(C), pages 232-239.
    9. Möllmann, Johannes & Buchholz, Matthias & Kölle, Wienand & Musshoff, Oliver, 2020. "Do remotely-sensed vegetation health indices explain credit risk in agricultural microfinance?," World Development, Elsevier, vol. 127(C).
    10. Apurba Shee & Calum G. Turvey & Liangzhi You, 2019. "Design and rating of risk-contingent credit for balancing business and financial risks for Kenyan farmers," Applied Economics, Taylor & Francis Journals, vol. 51(50), pages 5447-5465, October.
    11. Brei, Michael & Mohan, Preeya & Perez Barahona, Agustin & Strobl, Eric, 2024. "Transmission of natural disasters to the banking sector: Evidence from thirty years of tropical storms in the Caribbean," Journal of International Money and Finance, Elsevier, vol. 141(C).
    12. Benjamin Collier & Jerry Skees, 2012. "Increasing the resilience of financial intermediaries through portfolio-level insurance against natural disasters," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 64(1), pages 55-72, October.
    13. Collier, Benjamin, 2013. "Exclusive finance: How unmanaged systemic risk continues to limit financial services for the poor in a booming sector," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150433, Agricultural and Applied Economics Association.
    14. Apurba Shee & Calum G. Turvey & Ana Marr, 2021. "Heterogeneous Demand and Supply for an Insurance‐linked Credit Product in Kenya: A Stated Choice Experiment Approach," Journal of Agricultural Economics, Wiley Blackwell, vol. 72(1), pages 244-267, February.
    15. Bohorquez-Penuela, Camilo, 2021. "Weather Shocks and Agricultural Credit in Developing Countries: Evidence from a Second-Floor Institution," 2021 Annual Meeting, August 1-3, Austin, Texas 313994, Agricultural and Applied Economics Association.
    16. Isma il Tijjani Idris & Sabri Nayan, 2017. "A Pooled Mean Group Approach to the Joint Effects of Oil Price Changes and Environmental Risks on Non-Performing Loans: Evidence from Organisation of the Petroleum Exporting the Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 7(3), pages 345-351.
    17. Quaye, Frederick & Hartarska, Valentina & Nadolnyak, Denis, 2015. "Farmer Credit Delinquency in Southeastern US: Factors and Behavior Prediction," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196914, Southern Agricultural Economics Association.
    18. Klomp, Jeroen, 2014. "Financial fragility and natural disasters: An empirical analysis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 180-192.
    19. Abrego, Adriana & Guizar, Isai, 2017. "Resilience of Agricultural Microfinance Institutions to Rainfall Shocks," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258031, Agricultural and Applied Economics Association.
    20. Bos, Jaap & Li, Runliang, 2017. "Understanding the Trembles of Nature: How Do Disaster Experiences Shape Bank Risk Taking?," Research Memorandum 033, Maastricht University, Graduate School of Business and Economics (GSBE).
    21. Benjamin L. Collier, 2020. "Strengthening Local Credit Markets Through Lender‐Level Index Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(2), pages 319-349, June.

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