Microfinance: Debt or Equity? What are the Implications for Profitability and Social Welfare?

Global Economy & Finance Journal, Vol. 2, No. 2, pp. 64-80, September 2009

Posted: 4 Nov 2011

Date Written: 2007

Abstract

We provide a new evidence on a potential best way for a microfinance institution (MFI) to alleviate poverty while remaining financially profitable. Results show that equity contract generate more social welfare and profit than debt contract. By becoming a stakeholder in the micro-venture rather than a lender, the MFI is in a more tightly coupled relationship, providing knowledge and guidance necessary for ensuring success of the venture. A MFI providing micro-equity receives equity in the micro-business in return for his investment, the return on which is entirely dependent the success of the micro- venture, where as a MFI providing a loan gets paid first whether there is any profit or not. Results also show that microcredit financing places a heavy cash drain on micro-enterprises because the coupon is a precious resource needed to nurture and sustain the growth of micro-enterprises to propel them to the next stage of their development.

Keywords: Microfinance, Financial Contracting, Financial Self-Sufficiency, Social Welfare

JEL Classification: G21, D42, D82, G32

Suggested Citation

Ayayi, Ayi Gavriel, Microfinance: Debt or Equity? What are the Implications for Profitability and Social Welfare? (2007). Global Economy & Finance Journal, Vol. 2, No. 2, pp. 64-80, September 2009, Available at SSRN: https://ssrn.com/abstract=1954077

Ayi Gavriel Ayayi (Contact Author)

Université du Québec ( email )

3351 Boulevard des Forges C.P 500
Trois Rivières, Québec G9A 5H7
Canada
819 376-5011 ext 3137 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
688
PlumX Metrics