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Effective Cost of Borrowing from Microfinance Institutions

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  • Tutlani, Ankur

Abstract

It has been observed lately that the dependence on moneylenders for borrowing needs of poor borrowers remained stable despite the presence of MFIs, particularly in developing economies. This is surprising given the fact that MFIs charge relatively lower interest rate as compared to moneylenders. The paper explains this trend by arguing that the effective cost of borrowing from MFI is higher relative to the effective cost of borrowing from moneylender. It is due to the additional burden incurred in the form of transaction costs in case of MFI borrowing. Simulation results also support this phenomenon

Suggested Citation

  • Tutlani, Ankur, 2016. "Effective Cost of Borrowing from Microfinance Institutions," MPRA Paper 69502, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:69502
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    File URL: https://mpra.ub.uni-muenchen.de/69502/8/MPRA_paper_69486.pdf
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    References listed on IDEAS

    as
    1. Bhatt, Nitin & Tang, Shui-Yan, 1998. "The problem of transaction costs in group-based microlending: An institutional perspective," World Development, Elsevier, vol. 26(4), pages 623-637, April.
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    4. Jain, Sanjay, 1999. "Symbiosis vs. crowding-out: the interaction of formal and informal credit markets in developing countries," Journal of Development Economics, Elsevier, vol. 59(2), pages 419-444, August.
    5. de Aghion, Beatriz Armendariz & Gollier, Christian, 2000. "Peer Group Formation in an Adverse Selection Model," Economic Journal, Royal Economic Society, vol. 110(465), pages 632-643, July.
    6. Ahmed, Zia U., 1989. "Effective costs of rural loans in Bangladesh," World Development, Elsevier, vol. 17(3), pages 357-363, March.
    7. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
    8. Abhijit V. Banerjee & Esther Duflo, 2010. "Giving Credit Where It Is Due," Journal of Economic Perspectives, American Economic Association, vol. 24(3), pages 61-80, Summer.
    9. Thibaut Dehem & Marek Hudon, 2013. "Microfinance from the Clients' Perspective: An Empirical Enquiry into Transaction Costs in Urban and Rural India," Oxford Development Studies, Taylor & Francis Journals, vol. 41(sup1), pages 117-132, August.
    10. Jain, Sanjay & Mansuri, Ghazala, 2003. "A little at a time: the use of regularly scheduled repayments in microfinance programs," Journal of Development Economics, Elsevier, vol. 72(1), pages 253-279, October.
    11. Erica Field & Rohini Pande, 2008. "Repayment Frequency and Default in Microfinance: Evidence From India," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 501-509, 04-05.
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    More about this item

    Keywords

    Microfinance; Group lending; Informal finance; Transaction cost; Effective cost;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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