Monitoring and Loan Pricing: Do Microfinance Institutions Extract Rents from Entrepreneurs?

Abstract

Microfinance institutions (MFIs) have been criticized for charging high interest rates on loans. Building on multiple-principal agency theory, we argue that when an MFI acquires proprietary information about its clients through monitoring, it gains an information advantage over other lenders. Indeed, using data from 712 MFIs across 62 countries from 2010 to 2018, we find that this information advantage enables an MFI to extract rents by charging high interest rates. Furthermore, we find that MFIs that make more relationship-based loans, operate in less competitive markets, and those driven by for-profit commercial banking logic are more likely to extract rents.

Keywords: entrepreneurial finance, microcredit, monitoring, information advantage, interest rates

JEL Classification: G21, G51, O16