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The more the better? How collateral levels affect credit risk in agricultural microfinance

  • Müller, Kirsten
  • Musshoff, Oliver
  • Weber, Ron

Financial institutions still neglect to address agricultural clients. The main reasons for that are their perception that farmers bear higher risks than non-farmers and that their loan products are inadequate to accommodate the needs of agricultural entrepreneurs. As a result, many farmers still lack access to external finance. The aim of this paper is to investigate determinants of credit risk for agricultural loans disbursed by a Microfinance Institution (MFI) in Azerbaijan. In this context special attention is paid to repayment flexibility and the role of collaterals. MFIs are among the first financial institutions recently focusing on farmers with new loan products. We find that farmers are less risky than non-farmers, which is surprising because the opposite is widely believed. We furthermore find that the level of collateral has a negative influence on credit risk. Beyond that, we find that repayment flexibility increases credit risk.

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Paper provided by Georg-August University of Göttingen, Department of Agricultural Economics and Rural Development (DARE) in its series DARE Discussion Papers with number 1402.

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Date of creation: 2014
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Handle: RePEc:zbw:daredp:1402
Contact details of provider: Postal: Platz der Göttinger Sieben 5, D-37073 Göttingen
Web page: http://www.uni-goettingen.de/en/18500.html

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  1. Uthra K. Raghunathan & Cesar L. Escalante & Jeffrey H. Dorfman & Glenn C. W. Ames & Jack E. Houston, 2011. "The effect of agriculture on repayment efficiency: a look at MFI borrowing groups," Agricultural Economics, International Association of Agricultural Economists, vol. 42(4), pages 465-474, 07.
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  3. 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.
  4. Petrick, Martin, 2003. "Empirical measurement of credit rationing in agriculture: a methodological survey," IAMO Discussion Papers 45, Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO).
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  6. J. D. Von Pischke, 2002. "Innovation in finance and movement to client-centered credit," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(3), pages 369-380.
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  8. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
  9. Ulrike Vogelgesang, 2001. "Microfinance in Times of Crisis: The Effects of Competition, Rising Indebtedness, and Economic Crisis on Repayment Behavior," GK working paper series 2001-06, Post Graduate Programme "Allocation on Financial Markets", University of Mannheim, revised Nov 2001.
  10. Beatriz Armendáriz de Aghion & Jonathan Morduch, 2000. "Microfinance Beyond Group Lending," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(2), pages 401-420, July.
  11. Francesca Cassano & Karin Jõeveer & Jan Svejnar, 2013. "Cash flow vs. collateral-based credit," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 21(2), pages 269-300, 04.
  12. Michael Hamp & Carolina Laureti, 2011. "Balancing flexibility and discipline in microfinance: Innovative financial products that benefit clients and service providers," Working Papers CEB 11-044, ULB -- Universite Libre de Bruxelles.
  13. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  14. Julie Subervie, 2008. "The Variable Response of Agricultural Supply to World Price Instability in Developing Countries," Journal of Agricultural Economics, Wiley Blackwell, vol. 59(1), pages 72-92, 02.
  15. Norbert Hirschauer & Stefan Zwoll, 2008. "Understanding and managing behavioural risks: the case of malpractice in poultry production," European Journal of Law and Economics, Springer, vol. 26(1), pages 27-60, August.
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