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
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: Suggested Citation