Credit Union Policies and Performance in Latin America
Posted: 24 Apr 1997
Date Written: Undated
This paper explores empirical linkages between credit unions' policies and their financial performances, as measured by loan delinquency and profitability, using a unique micro dataset of credit unions in three Latin American countries. The estimated translog profit function is generalized using a slack variable concept that prameterizes any systemic deviation from profit- maximizing behavior exhibited within the sample, as predicted by previous research on credit unions. Two types of policy variables are examined: one group of variables that affect the incentives of borrowers to repay loans, and another group of variables that affect the credit union's ability to screen loan applications accurately. Certain variables from each group are found to affect both delinquency and profitability, in accordance with theory. The findings are strongly consistent with moral hazard on the part of borrowers as well as an efficiency wage hypothesis for credit unions. In addition, the average credit union in the sample is found to operate at a substantially smaller scale (as measured by both inputs and outputs) than would be profit-maximizing at the observed vector of netput prices, possibly reflecting administrative inefficiencies.The issues addressed in this paper have important policy implications for the successful operation of credit unions in developing countries, and thence for overall economic development. Although economic theory has long suggested certain of the observed linkages, these hypotheses have not yet been widely accepted by industry practitioners in the sample countries. Direct observation of their importance has previously been hampered by the unavailability of sufficiently complete or reliable data. The recently developed dataset used here, incorporating a blend of financial reporting and custom surveys, permits an unprecedented test of these issues.
JEL Classification: H30, N26
Suggested Citation: Suggested Citation