Franchising Microfinance

27 Pages Posted: 14 Mar 2006

See all articles by Amit Bubna

Amit Bubna

Indian School of Business

Bhagwan Chowdhry

UCLA Anderson; Indian School of Business

Date Written: September 27, 2007

Abstract

Financial intermediaries worldwide are seeking mechanisms for participating in micro lending. We consider a simple model where a bank may use informed local capitalists as intermediaries for on-lending. But the availability of multiple credit sources provides borrowers with an incentive to default voluntarily, making the bank's on-lending mechanism a non-starter. We explore whether a coalition of local capitalists, effectively limiting borrower's opportunity for defaulting multiple times, might be sufficient to facilitate on-lending. Instead, we find that a monopoly moneylender with superior enforcement technology can out-compete the local capitalist coalition if the moneylender also enjoys the smallest transactions costs of lending. We how that a credible competitive threat to the monopoly moneylender can only arise if the local capitalist coalition can also be made cost-effective either by direct subsidies or by measures such as standardization, economies of scale and implementation of best practices. We argue that Franchising is one potential mechanism that could deliver both cost-efficiencies as well as ability for local capitalists to form a coalition.

Keywords: Microfinance, Microcredit, Moneylender, Franchising

JEL Classification: G21, O17

Suggested Citation

Bubna, Amit and Chowdhry, Bhagwan, Franchising Microfinance (September 27, 2007). Available at SSRN: https://ssrn.com/abstract=890667 or http://dx.doi.org/10.2139/ssrn.890667

Amit Bubna

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

Bhagwan Chowdhry (Contact Author)

UCLA Anderson ( email )

Los Angeles, CA 90095-1481
United States
310-825-5883 (Phone)
310-206-5455 (Fax)

HOME PAGE: http://bit.ly/bhagwanUCLA

Indian School of Business ( email )

Hyderabad, Gachibowli 500 032
India

HOME PAGE: http://bit.ly/bhagwanUCLA

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