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The rapid credit growth and financial stability in microfinance institutions: Lessons from the past financial crisis

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  • Tehulu, Tilahun

Abstract

Financial crisis could be transmitted across countries through the contraction of capital inflows to the financial sector. Since credit booms in emerging market economies might be due to large capital inflows, microfinance institutions (MFIs) with higher credit growth during the pre-global financial crisis might have faced a higher credit contraction during the crisis as significant decline in capital flows could be expected. Hence, the study examines the effect of credit expansion on financial stability in the context of MFIs and the moderating effect of legal status on MFI credit boom and bust cycle using panel dataset of 101/121 MFIs in Sub-Saharan Africa (SSA) covering 2004–2009. Using the Ordinary Least Square (OLS) regression, the study confirms that there is weak or no boom–bust pattern in MFI credit growth depending on their legal status. MFIs with rural bank and NGO legal status exhibited a boom–bust pattern in credit growth while the boom had little impact on the subsequent credit growth of NBFIs and micro-banks. Moreover, the rapid credit growth had no any negative effect on credit union/cooperative subsequent lending behavior suggesting that legal status has a moderating effect on credit boom–bust cycle. The study also uncovers that changes in non-deposit borrowings and MFI size have amplified/mitigated credit contractions during the crisis.

Suggested Citation

  • Tehulu, Tilahun, 2022. "The rapid credit growth and financial stability in microfinance institutions: Lessons from the past financial crisis," MPRA Paper 129099, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:129099
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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