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Financial inclusion through specialization or diversification with group and individual loans in microfinance

Author

Listed:
  • Valentina Hartarska

    (Auburn University)

  • Jingfang Zhang

    (Alcorn State University)

  • Denis Nadolnyak

    (Auburn University)

Abstract

The poorest clients of microfinance institutions (MFIs) use more group loans than individual loans, yet fewer group loans are available, possibly because of their higher cost. We evaluate whether MFIs that offer both group and individual loans benefited from this diversification relative to specializing in only one loan type. We estimate separate economies of diversification and their changes over time for credit-only and credit-plus-deposit MFIs with panel data from 101 countries for the period 2008 to 2018. To accommodate the small number of MFIs specializing in group loans, we apply an estimation method that resolves the “excessive extrapolation” challenge. The results indicate that over a quarter of credit-only MFIs have on average 10% lower costs from diversification, while the majority of credit-plus-deposit MFIs are better off specializing. Since policymakers tend to support the credit-plus-deposit for-profit business model, awareness of the cost implications is essential as it may limit the financial inclusion of the poorest users of group loans.

Suggested Citation

  • Valentina Hartarska & Jingfang Zhang & Denis Nadolnyak, 2025. "Financial inclusion through specialization or diversification with group and individual loans in microfinance," Empirical Economics, Springer, vol. 68(6), pages 2767-2798, June.
    • Handle: RePEc:spr:empeco:v:68:y:2025:i:6:d:10.1007_s00181-025-02714-3
    DOI: 10.1007/s00181-025-02714-3
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    More about this item

    Keywords

    Outreach; Economies of diversification; Microfinance; Group loans; Individual loans; Excessive extrapolation;
    All these keywords.

    JEL classification:

    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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