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On The Provision Of Micro Loans - Microfinance Institutions And Traditional Banks

  • Rubana Mahjabeen

    ()

    (Department of Economics, Truman State University)

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    This paper employs a utility maximizing model to answer two questions: (i) what are the cost-related factors that determine the supply of a loan by traditional banks and microfinance institutions (MFIs)?; and (ii) why is the supply of micro loan zero under a bank¡¯s maximization problem while it is positive under the maximization problem of an MFI? We find that costs associated with default, information asymmetry and liability determine the supply of a loan by a financial institution. Furthermore, we show that under certain conditions (that we derive) a bank may make a loss if it provides micro loan. As a result, it does not supply micro loan.

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    File URL: http://www.jed.or.kr/full-text/35-1/4.pdf
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    Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

    Volume (Year): 35 (2010)
    Issue (Month): 1 (March)
    Pages: 59-73

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    Handle: RePEc:jed:journl:v:35:y:2010:i:1:p:59-73
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    1. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
    2. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    3. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
    4. Joseph P. Hughes & Loretta J. Mester & Moon Choo-Geol, 2000. "Are scale economies in banking elusive or illusive? evidence obtained by incorporating capital structure and risk-taking into models of bank production," Proceedings 700, Federal Reserve Bank of Chicago.
    5. Joseph P. Hughes & William W. Lang & Loretta J. Mester & Choon-Geol Moon, 2000. "Recovering risky technologies using the almost ideal demand system: an application to U.S. banking," Working Papers 00-5, Federal Reserve Bank of Philadelphia.
    6. Jean-Jacques Laffont, 2000. "Collusion and Group Lending with Adverse Selection," Development Working Papers 147, Centro Studi Luca d\'Agliano, University of Milano.
    7. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
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