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

Author

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  • Rubana Mahjabeen

    (Department of Economics, Truman State University)

Abstract

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.

Suggested Citation

  • Rubana Mahjabeen, 2010. "On The Provision Of Micro Loans - Microfinance Institutions And Traditional Banks," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 35(1), pages 59-73, March.
    • Handle: RePEc:jed:journl:v:35:y:2010:i:1:p:59-73
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    References listed on IDEAS

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    Cited by:

    1. Hessou, Hélyoth T.S. & Lensink, Robert & Soumaré, Issouf & Tchakoute Tchuigoua, Hubert, 2021. "Provisioning over the business cycle: Some insights from the microfinance industry," International Review of Financial Analysis, Elsevier, vol. 77(C).

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    Keywords

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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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