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Dynamic Incentives in Microfinance – What about the Farmers?

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  • Hering, Imke
  • Musshoff, Oliver

Abstract

Dynamic incentives have become a common measure in microfinance institutions (MFI) to counteract the risk of default and to strengthen the borrower’s identification with his microlender. This study focuses on relaxation in loan volume rationing in the course of the bank-borrower relationship. More particularly, we consider the differentiation in lending politics faced by farmers and non-farmers and match our findings with the repayment performances of both client groups. By means of a rich data set for the years 2007 until 2013 provided by a MFI in Azerbaijan, we demonstrate that farmers face a higher degree of loan volume rationing but outperform the non-farmers with respect to loan repayments. Moreover, our results reveal that relaxation in loan volume rationing works as a tool for risk management in MFIs. In conclusion, we deduce that MFIs have still not recognized the full business potential of their farming clients.

Suggested Citation

  • Hering, Imke & Musshoff, Oliver, 2015. "Dynamic Incentives in Microfinance – What about the Farmers?," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 204673, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea15:204673
    DOI: 10.22004/ag.econ.204673
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    Agricultural Finance; Community/Rural/Urban Development;

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