The Role of Local Depositors in Controlling Expenses in Small-Scale Financial Intermediation: An Empirical Analysis
23 Pages Posted: 22 Oct 2007
Using data on Irish loan funds, a nineteenth-century quasi-bank system, we explore how the capital structure affects managerial agency to impact non-interest expenses. These organizations had no equity-holders and were financed by deposits and "capital," comprising donations and accumulated profits, creating problems of managerial moral hazard. Higher net income (before non-interest expenses) is associated with higher salaries and other non-interest expenses. More surprisingly, higher "capital"-deposit ratios led to higher expenses even after controlling for net income. While this institution is unique, the findings suggest that depositors could assist in controlling expenses in micro-finance organizations.
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