Formal Financial Institutions Research Articles

Finance and Growth for Microenterprises: Evidence from Rural China

Using a survey dataset of Chinese rural households, we find that access to external finance is positively associated with the decision to become entrepreneur and the initial investment for microenterprises. Also, we find that use of informal finance, especially financing from friends and family, is positively associated with sales growth of microenterprises with employees, but not of self-employed. We do not find any significant relationship between the use of formal finance and firm growth. Our findings underline the importance of finance for entrepreneurship and microenterprise growth, and the role of informal finance in the absence of efficient formal financial institutions.

Do formal credit constraints affect the rural household consumption in China?

The article investigates the consequences of credit constraints on rural household consumption in China. Based on a unique rural finance and consumption survey, the authors first identify the credit constraint status of rural households from formal financial institutions. Then, they apply an endogenous switching regression model to compare the consumption responses to household production inputs for credit constrained and non-constrained households. The estimation results reveal that the credit constraint could result in the crowding out effect of the aggregate household consumption from its production inputs. Nonetheless, similar to the non-constrained households, the credit constraint households are capable of smoothing their necessary consumption.  

Credit Risk Portfolio Management in Microfinance Banks: Conceptual and Practical Insights

Microfinance Banks have a critical role of providing different financial products and services to the people most especially the low income earners who lack collateral to borrow from formal financial institutions like the commercial banks. This category of financial institutions serves some of the world's most needy. A significant challenge facing these banks is the battle to control its portfolio at risk to remain within the international bench mark. In this paper, we reviewed practical approaches to controlling loan default and other related risks common to Microfinance Banks. The paper also reviewed related literatures on Microfinance credit risk portfolio assessment and suggested the place of Operations Research experts in tackling Microfinance Banks challenges. The major finding was that credit risk continues to be a threat to Microfinance Banks sustainability. Our conclusion is that Microfinance Banks' credit risk will reduce to the barest minimum if the recommended practical approaches to controlling loan defaults are adhered to.

Experiences of microfinance institutions serving very small to small enterprises in Latin America

Very small enterprises (VSEs) in Latin America and the Caribbean (LAC) represent a broad and heterogeneous segment, often underserved by formal financial institutions. To respond to this gap, many microfinance institutions (MFIs) are starting to move upmarket to serve small and medium enterprises, and in particular, VSEs. However, there has been little research or documentation of their experiences to date. This article presents the results of a recent study of the existing practices in Latin America of MFIs serving VSEs. The keys to entering the VSE market effectively, are that an MFI has appropriate infrastructure to expand upmarket and that it strikes an appropriate balance between risk management and an institution's commercial goals. This can be difficult, particularly if MFIs underestimate the need to adapt their commercial strategy, credit methodology, hiring and training practices, risk management, and financing strategies. Further, the interviewed institutions are recent entrants to the VSE space and the macroeconomic context in most of their countries has been favourable to microenterprise and VSE growth, which may buffer VSEs and the institutions that serve them. As such, their models have not really been fully tested and the lessons drawn from their experiences are evolving.

Agricultural credit rationing in Ghana: what do formal lenders look for?

Purpose– The purpose of this paper is to investigate the determinants of agricultural credit rationing by formal lenders in Ghana.Design/methodology/approach– This study employed descriptive statistics, analysis of variance (ANOVA) and Heckman's two-stage regression model to identify types of rationing faced by farmers and investigate factors that influence agricultural credit rationing by formal financial institutions. Data used in this study are gathered through a survey of 595 farmers in seven districts within Brong Ahafo Region of Ghana.Findings– The result reveals that farmers face three types of rationing. Evidence from the Heckman two-stage models shows that engagement in off farm income generating activities, increase in farm size, positive balances on accounts and commercial orientation of the farmers has the potential to reduce rationing of credit applicants by formal lenders.Practical implications– The results provide information on the factors that need to be considered as important in an attempt to reduce agricultural credit rationing by formal lenders.Originality/value– The value of this study is that farmers would use the results of this study to improve access to required amount of agricultural credit from formal financial institutions. The information would also benefit stakeholders in the agricultural sector, particularly youth in agriculture program organized by Ministry of Food and Agriculture in Ghana as how to improve access to credit and reduce rationing of program participants by formal financial institutions.

Family and Friends Versus Formal Financial Institutions: Lessons Learned About Financial Inclusion of Low Income Families in Greater Jakarta, Indonesia

This paper aims to gain further understanding on what factors contribute such reliance to informal channels, such as family and friends. This study employs survey data obtained from 1,220 families across Greater Jakarta, Indonesia. Findings showed that people who do not rely on formal channel for deficit financing are 2.6 times more likely to rely on their family and friends, while people who do not rely on their family or friends are 7.1 times more likely to rely on formal financing options. This may indicate that formal financing channel act as direct substitute to informal channels of family and friends for low income families in Greater Jakarta area.

THE LEGAL AND REGULATORY ASPECTS OF INTERNATIONAL REMITTANCES AND THEIR IMPACT ON MIGRANT WORKERS AND ASYLUM SEEKERS IN SOUTH AFRICA

South Africa, being a relatively politically and economically stable African nation, offers numerous pull factors making it an attractive destination for many African, as well as international, migrants. Migrants usually leave their countries of origin to seek work opportunities in other countries. Regardless of the legality of work, migrants find the need to send money to families they have left in their country of origin. When such a need arises, the migrant worker, the low-income migrant worker in particular, often faces considerable legal as well as financial obstacles in accessing the services of formal financial institutions such as banks. As a consequence, they may have to rely on informal means to send their funds. There are numerousfactors that may drive the preference for informal markets, such as cost factors and other payment-system issues. However, this analysis examines how legal and regulatory provisions impact upon the international remittance industry in South Africa and the ability of the low-income migrant worker to access formal remittance services.

Studying the Effect of Privatization on Employees’ Job Satisfaction in Communication Center (A Case Study in Kerman (Iran) Province)

The development of Small and Medium Enterprises (SMEs) in Indonesia showed a tendency has increased along with improvement of the national economy. Indonesia together with India and China are the three countries in the world who have the highest economic growth within the last 3 years. However, SMEs are still confronted with basic problems such as the limited access to the sources of financing from formal financial institutions, particularly from the banks. This problem causes them to rely on informal sources of financing. Currently, the informal financial institutions are more striking among SMEs because it is more flexible, for example in terms of requirements and the amount of loans that are not as tight as banking. This makes informal financing institutions increasingly popular among small and medium entrepreneurs. One of them that is quite close with SMEs is Islamic Microfinance Institutions or commonly known as Baitul Maal wa Tamwil (BMT). However, both the BMTs and SMEs have difficulties in cooperating each other mainly related to the mastery of information technology to improve efficiency in managing transactions under Shariah (islamic law)-based business contracts. Therefore, the authors urge that the need for accounting information systems to facilitate the contracts. This paper aims to discuss the urgency of drafting a framework for information systems for BMTs to support the operations of partnership contracts. This paper proposes the use of Open Source Software (OSS) as the basis for developing a system that is technically cheaper, more efficient and easy to implement.

The Need for Accounting Information System to Facilitate Partnership Contracts in Islamic Microfinance Institutions: The Case of Baitul Maal wa Tamwil (BMT) in Indonesia

The development of Small and Medium Enterprises (SMEs) in Indonesia showed a tendency has increased along with improvement of the national economy. Indonesia together with India and China are the three countries in the world who have the highest economic growth within the last 3 years. However, SMEs are still confronted with basic problems such as the limited access to the sources of financing from formal financial institutions, particularly from the banks. This problem causes them to rely on informal sources of financing. Currently, the informal financial institutions are more striking among SMEs because it is more flexible, for example in terms of requirements and the amount of loans that are not as tight as banking. This makes informal financing institutions increasingly popular among small and medium entrepreneurs. One of them that is quite close with SMEs is Islamic Microfinance Institutions or commonly known as Baitul Maal wa Tamwil (BMT). However, both the BMTs and SMEs have difficulties in cooperating each other mainly related to the mastery of information technology to improve efficiency in managing transactions under Shariah (islamic law)-based business contracts. Therefore, the authors urge that the need for accounting information systems to facilitate the contracts. This paper aims to discuss the urgency of drafting a framework for information systems for BMTs to support the operations of partnership contracts. This paper proposes the use of Open Source Software (OSS) as the basis for developing a system that is technically cheaper, more efficient and easy to implement.

Credit off-take from formal financial institutions in rural India: quantile regression results

Abstract Extending financial services to unbanked population in India has remained a central part of the policy thrust of the Indian government for decades. To that effect, a widespread formal credit delivery mechanism has been established to meet the credit requirements of rural communities. However, the Indian government-backed formal financial sector has had limited success in providing resources to poor rural households, which has led to strong criticism of the policy and its implementation. In this study, we use data from 600 rural households spread across six Indian states to examine the changing distribution of credit off-take among borrowers of formal financial institutions. By using quantile regression, we find that even among rural households that could access loans from the formal banking sector, the distribution of credit off-take is skewed towards resource-rich households. We also find that even among borrowers in the upper quantiles of the conditional loan distribution, marginal farmers received substantially less loan amounts than those belonging to the category of medium and large farmers. JEL classifications C31, Q14

Downgrading Financial Service Delivery and Institutional Sustainability: A Case Study of Akwapim Rural Bank, Ghana

Rural financial markets in the developing world are faced with the problem of information asymmetry and are monopolistically competitive. Based on this, one policy option to enhance rural clients’ access is for formal financial institutions to mimic products and services of informal intermediaries. Empirical evidence on impact of mimicry on institutional sustainability can help improve policy choices, yet there is a dearth of studies on this. Using time series data to analyse trends in selected financial ratios and means this study examines the impact that the mimicking of an informal financial product by a formal financial institution ( Rural Bank) has on the outreach and sustainability. The time series data was collected from the bank’s financial statements and returns to the central bank between 1996 and 2005. It was found that adoption of informal financial product enhanced outreach and sustainability of the bank. This study, demonstrates that the mimicry policy option if adopted by formal financial institutions can enhance availability of financial services to the productive poor and also lead to long-term sustainability of financial institutions.

Micro, Small and Medium Enterprises’ External Financing Challenges: The Role of Formal Financial Institutions and Development Finance Intervention in Tanzania

Micro, Small and Medium Enterprises (MSMEs) play a significant role in income generation, job creation, poverty reduction and reducing income inequality. However, MSMEs from developing countries are exposed to several challenges in their business operations. Among others, access to external financing has been cited to be the most pressing challenge for MSMEs in developing economies and Tanzania in particular. Using a desk review methodology, this paper explores in detail the causes of the problem and mechanisms currently put in place to address these. Briefly, the paper delineates how the structural mismatch between mainstream funding requirements and unique characteristics of MSMEs has led to market failure. It further provides insights on innovative financing strategy, which may be a better alternative to circumvent the problem.

Vulnerability of household consumption to floods and droughts in developing countries: evidence from Pakistan

AbstractAggregate shocks such as droughts and floods cannot be perfectly insured by risk sharing within a village. Given this inability, what type of households are more vulnerable in terms of a decline in consumption when a village is hit by such shocks and what kind of microeconomic mechanism underlies the household heterogeneity in vulnerability? These questions are investigated using two-period panel data collected in rural Pakistan in 2001 and 2004. We compare consumption response to droughts, floods and health shocks and investigate how the response differs across different types of households. Empirical results show that the impact of droughts was negligible, younger and more landed households were less vulnerable to floods, and households with greater access to formal financial institutions were less vulnerable to idiosyncratic health shocks. The empirical pattern suggests the possibility of risk sharing among households that are heterogeneous in both risk aversion and credit access.

Microfinance through non-governmental organizations and its effects on formal and informal credit

Purpose – Internationally, microfinance run by non-governmental organizations (NGOs) is often considered an important approach to meeting the credit demand of rural households, particularly among the poor. However, the perceived competitions with formal financial institutions and concerns about financial risks in the rural economy have impeded the development of microfinance by NGOs in China. Despite these concerns about NGO microfinance, little empirical evidence has been brought to prove them. The purpose of this paper is to provide empirical evidence of the relationship between NGO microfinance and farmers’ demand for formal and informal credit in rural China. Design/methodology/approach – The study is based on a household longitudinal data set consisting of 749 households from 40 microfinance villages in rural China. This study draws evidence from China's largest NGO microfinance. Out of the five county branches where China Foundation for Poverty Alleviation has launched institutionalized microfinance since 2006, the authors selected two of them. A random sampling approach was applied in surveying villages and households. In an effort to create impact assessments, the authors surveyed the detailed information on household characteristics and credit access during the period 2006-2009. A panel data is thus structured for the analysis. Findings – The authors found that the demand for credit in rural China is immense and rising, as formal financial institutions have gradually moved away from less developed regions in rural areas. In its place, informal lending has become a primary source of credit for the poor. However, where NGO microfinance has become available, both formal and informal credit has slowed down. The development and expansion of NGO microfinance did stand up as a substitution for institutional lenders and informal financial networks. Research limitations/implications – The findings have profound policy implications. First, since the development of NGO microfinance fill the demand for credit in rural China and poses low financial risk, the intellectual bias against NGO microfinance is unwarranted. In particular, the regulations that hamper the development of NGO microfinance should be corrected. Second, informal networks do not appear to be costless. Where NGO microfinance can substitute for them, it can mitigate the financial stresses related to the informal credit market.

Social Capital, Network Effects, and Savings in Rural Vietnam

Information failures are a major barrier to formal financial saving in low‐income countries. We explore the extent to which social capital in rural Vietnam plays a role in increasing formal savings where knowledge gaps exist. Social capital is defined as information sharing and the elimination of information asymmetries through active participation in the Women's Union. We consider high‐ and low‐quality networks in terms of the quality of information transmitted. We find that membership of high‐quality networks leads to higher levels of saving in formal financial institutions and saving for productive investments. Our results support a role for social capital in facilitating savings and suggest that transmitting financial information through the branches of the Women's Union could be effective in increasing formal savings at grassroots level. We also conclude that it is important to ensure that the information disseminated is accurate given that behavioral effects are also found in networks with low‐quality information.

Rural credit markets in South Africa: A review of theory and empirical evidence

The demand for and supply of financial services in general and credit instruments in particular by rural South Africa still remains a confounding problem. The aim of this paper is to determine the status of rural credit markets in South Africa by reviewing theory and evidence from empirical studies. It is observed that financial markets in South Africa are fragmented between formal and informal markets. Formal financial markets generally serve urban and peri-urban areas with a thin distribution of services to people living in rural areas. Rather, informal financial institutions such as savings clubs (stockvels), co-operatives, moneylenders (mashonisas) and village banks are the more dominant providers of financial services. Commercial banks and other formal financial institutions cite high operating costs such as information gathering, monitoring and enforcement as some of the reasons for limited participation in rural financial markets. Such attitudes have been observed to retard entrepreneurial innovation and growth among small to medium size enterprises and smallholder farmers. Results of this analysis have policy implications in the areas of reduction of unemployment, poverty and sustainable economic growth in South Africa. Policies directed at increasing financial intermediation via formal financial institutions are recommended

Linkage System between Modern and Traditional Cooperatives with Formal Financial Institution and Problems of These Cooperatives in Fund Mobilization

Linkage System between Modern and Traditional Cooperatives with Formal Financial Institution and Problems of These Cooperatives in Fund Mobilization

Islamic Finance and Financial Inclusion: Measuring Use of and Demand for Formal Financial Services among Muslim Adults

In recent years, the Islamic finance industry has attracted the attention of policymakers and international donors as a possible channel through which to expand financial inclusion, particularly among Muslim adults. Yet cross-country, demand-side data on actual usage and preference gaps in financial services between Muslims and non-Muslims have been scarce. This paper uses novel data to explore the use of and demand for formal financial services among self-identified Muslim adults. In a sample of more than 65,000 adults from 64 economies (excluding countries where less than 1% or more than 99% of the sample self-identified as Muslim), the analysis finds that Muslims are significantly less likely than non-Muslims to own a formal account or save at a formal financial institution after controlling for other individual- and country-level characteristics. But the analysis finds no evidence that Muslims are less likely than non-Muslims to report formal or informal borrowing. Finally, in an extended survey of adults in five North African and Middle Eastern countries with relatively nascent Islamic finance industries, the study finds little use of Sharia-compliant banking products, although it does find evidence of a hypothetical preference for Sharia-compliant products among a plurality of respondents despite higher costs.

マイクロファイナンスとインフォーマル信用制度の相互作用について

マイクロファイナンスとインフォーマル信用制度の相互作用について

Islamic Microfinance in India: An Overview

Poverty eradication in Islam is a cherished goal and microfinance is the best way for Muslim organizations to practice it, considering the economic condition of the community in India. Islamic Microfinance Institutes (IMIs) should be established in every economically weak Muslim locality so that the poor Muslims could easily get financial services to meet their basic needs and develop a habit of saving which is quite absent from the culture of wage earners. The Islamic Microfinance for poverty alleviation is more inclusive than Conventional Microfinance because it minimizes the dependency on charity and facilitates the benefits to flow to the poorest of the poor and the destitute, which are not in a position to generate any income and wealth from the present day interest-ridden formal financial institutions. In this paper an attempt has been made to review the concept of Islamic Microfinance system and its present and future in India.