Loan officer rotation and credit access: evidence from Madagascar

Abstract

PurposeWith exclusive data from a commercial microfinance institution (MFI) in Madagascar, the purpose of this paper is to investigate if loan officer rotation (change of loan officer) has an effect on credit access (loan approval) in rural and in urban areas. The authors further analyze how the frequency of loan officer rotation affects credit access in rural and in urban areas.Design/methodology/approachThe authors apply propensity score matching to compare credit access between loan applicants who experienced loan officer rotation and loan applicants who experienced no loan officer rotation in rural and in urban areas.FindingsResults show that loan officer rotation has a positive and statistically significant effect on credit access. The authors observe further that loan officer rotation has a different effect on credit access in rural and in urban areas. Whilst rural loan applicants who experienced loan officer rotation are more likely to have credit access, urban loan applicants show no statistically significant effect of loan officer rotation on credit access. For the frequency effect on credit access, the authors observe that one loan officer rotation has a positive and statistically significant effect on credit access whereas results are mixed for two loan officer rotations.Research limitations/implicationsEven though the authors can show that loan officer rotation can improve credit access to loan applicants, especially in rural areas, the conditions in Madagascar are unique. Therefore, results need to be verified in other countries and institutional contexts.Practical implicationsFrom the perspective of MFI, the authors recommend that the management of MFI needs to provide better tools to loan officers to improve on the evaluation of agricultural loan products or standardize the assessment of agricultural loan products to improve on lending decisions. Further, if applicable, the authors recommend that MFI should consider using credit worthiness assessment procedures which rely less on loan officer’s judgment for loan evaluation, such as automated systems. From the perspective of loan applicants, the authors recommend that loan applicants should request for a change of loan officer if they experience successive loan applications rejection.Originality/valueTo the authors’ knowledge, this paper is the first to provide empirical evidence on the effect and frequency of loan officer rotation on credit access in Sub-Sahara Africa, and Madagascar, in particular.