Resilience of agricultural microfinance institutions to rainfall shocks

Abstract

This paper adds nuance to our understanding of how precipitation shocks impact the financial performance of Microfinance Institutions (MFI). Using a unique longitudinal dataset of agricultural MFIs in Peru, Ecuador, and Mexico, the paper first shows that rainfall shocks have a statistically significant effect on indicators of credit risk and profitability. Next, it tests if such effects are influenced by the funding costs. The analysis is guided by the equilibrium conditions of a theoretical model that suggests that MFIs with a comparatively higher cost of access to extra funds are more resilient to this kind of systemic events. The econometric estimates are consistent with the theoretical implication by showing that the extent of the effect of precipitation shocks on the profitability and quality of the loan portfolio is lower for those institutions that had access to relatively higher funding costs.