The Empirics of Microfinance Lending Methodologies
Posted: 19 Nov 2010
Date Written: 2008
We investigate the microbank’s choice of lending methodology with particular emphasis on group and individual loans. The repayment hypothesis says that the group loan is chosen since borrowers repay under a group loan scheme. The dual objectives hypothesis investigates the choice when the microbank seeks both financial sustainability and outreach to the poor. Our data span 379 microbanks from 73 countries and are retrieved from rating bureaus’ reports. Ordered logit, instrumental variables, and simultaneous equations regressions are performed to differentiate between the hypotheses. We find that the repayment argument does not tell the whole story. Although significant, repayment risk explanation does not tell the full story. Operational costs, profitability, main market (urban or rural), gender bias, and average loan also play their part. Increased competition tends to favour individual loan. A prediction based on the analysis is that microfinance institutions will increasingly turn to individual lending.
Keywords: Microfinance, Lending, Group
JEL Classification: G21, G32
Suggested Citation: Suggested Citation