Financial Performance and Outreach: A Global Analysis of Leading Microbanks

51 Pages Posted: 20 Apr 2016

See all articles by Robert Cull

Robert Cull

World Bank - Development Research Group (DECRG)

Asli Demirgüç-Kunt

World Bank

Date Written: February 1, 2006

Abstract

Microfinance contracts have proven able to secure high rates of loan repayment in the face of limited liability and information asymmetries, but high repayment rates have not translated easily into profits for most microbanks. Profitability, though, is at the heart of the promise that microfinance can deliver poverty reduction while not relying on ongoing subsidy. The authors examine why this promise remains unmet for most institutions. Using a data set with unusually high quality financial information on 124 institutions in 49 countries, they explorethe patterns of profitability, loan repayment, and cost reduction. The authors find that institutional design and orientation matter substantially. Lenders that do not use group-based methods to overcome incentive problems experience weaker portfolio quality and lower profit rates when interest rates are raised substantially. For these individual-based lenders, one key to achieving profitability is investing more heavily in staff costs - a finding consistent with the economics of information but contrary to the conventional wisdom that profitability is largely a function of minimizing cost.

Keywords: Banks&Banking Reform, Economic Theory & Research, Economic Adjustment and Lending, Investment and Investment Climate, Rural Finance

Suggested Citation

Cull, Robert and Demirgüç-Kunt, Asli, Financial Performance and Outreach: A Global Analysis of Leading Microbanks (February 1, 2006). World Bank Policy Research Working Paper No. 3827, Available at SSRN: https://ssrn.com/abstract=922953

Robert Cull (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

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Asli Demirgüç-Kunt

World Bank ( email )

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Washington, DC 20433
United States