Poor Borrowers Research Articles

Microfinance institution and moneylenders in a segmented rural credit market

PurposeThe effectiveness of microfinance institutions (MFIs) in rescuing poor borrowers from “clutches of” moneylenders has been a much-debated topic over the past few decades. This paper aims to contribute by presenting a model of competition between a socially motivated MFI and profit-maximizing moneylenders when market segmentation exists.Design/methodology/approachA principal–agent model is used to characterize equilibrium conditions under scenarios where only moneylenders operate, only MFI operates and when both co-exist to pose comparative results effectively.FindingsThe authors find unambiguous benefits arising when a welfare-maximizing MFI enters the market. However, there are benefits to having local agents like moneylenders on the ground who also have informational advantages.Originality/valueTo the best of authors’ knowledge, this study is the first to evaluate the competition between MFI and moneylenders under the framework of captive and noncaptive segments with a mandatory savings requirement.

The dual nature of “peculiar problems” in microfinancing: perspectives on market efficiency and public policy nexus

PurposeThe microfinancing sector is infamous for being prone to high credit risks due to loan defaults by its poor borrowers. Conversely, the sector is also criticized for creating debt traps for the poor. The dual nature of these peculiar problems in microfinancing causes the market failure phenomenon. Therefore, the current study explores whether public policy intervention is required to address market failure.Design/methodology/approachThe study undertakes a critical review of existing literature, the news, the policy documents and other publicly available information to shape the viewpoints in this study. Constructive criticism is used to build arguments to arrive at a conceptual framework that depicts how public policy should interact with markets to address the peculiar problems of the microfinancing sector.FindingsThe findings indicate that market failure in microfinancing is real and pressing. Therefore, public policy is invited, though in its limited form. While the policy intervention may help the formal microfinancing arena by regulating the interest rates, the policy administration in the informal sector is likely to fail. Therefore, the policy should attempt to create an environment of inclusiveness. Policies that rely on coercion are not recommended. In the long run, subsidies via policy intervention are discouraged. Instead, the policy should motivate the microfinancing sector to become self-reliant.Originality/valueThe study is one of its kind to provide perspectives on specific market failures and policy interventions in microfinancing, particularly in economies where formal and informal sectors coexist and are equally crucial.

The microfinance sector in Uganda: Journey, experiences, lessons, and outlook

The purpose of this paper is to explore the microfinance industry to note where it has been, the industry experiences and lessons learned, and the peer into its future. The study adopted a qualitative approach reviewing the extant literature about the subject. The review reveals that the industry evolved from the desire to help poor people access affordable microcredit and transform themselves into economically empowered members of their communities. Consequently, a number of initiatives have been undertaken to develop the industry. This has included targeted legislation and institutional development both globally and in Uganda. The industry experiences indicate that both welfarist and institutionalist objectives of developing the microfinance industry can be pursued with minimal contradiction. However, events pose a mixed bag of results. One the one hand, success stories of microfinance enhancing access to affordable credit, and empowering the poor financially to be more productive, among others, are mentioned. On the other hand, blatant failures at institutional and individual level are noted. Cases of usury, corruption, diversion of funds, confiscation of poor borrowers’ property, a weak credit culture, and politicisation of the industry are noted. Nonetheless, the industry remains promising to the poor given the existing infrastructure. Moving forward, strengthening regulation, increased funding, depoliticisation of the microfinance policy and programmes will refocus the industry to serve better the poor.

Make Microfinance Great Again: Can Flexibility in Repayments Improve Business Outcomes in North India?

Classic microfinance loan contracts characterised by rigid weekly repayment schedules used by most microfinance institutions (MFIs) offer little flexibility—and little benefit—to borrowers who are poor and have seasonal income. Previous research has also shown that such contracts can negatively affect the economic well-being of poor borrowers leading to underinvestment of capital, selling of productive assets, over-indebtedness through cross-financing from informal sources, reductions in consumption and income, and in some cases, a deterioration in borrowersʼ mental health arising from stress and worry. If lenders offered more flexibility in loan repayment schedules, would it help to overcome some of these problems? To explore this, we tested whether clientsʼ business outcomes were sensitive to various repayment schedules using primary data collected from the clients of three MFIs, a cooperative society and a few local traders specialising in business lending in a village in North India. We analysed alternatives to the rigid contract model, focussing on the degree of flexibility and the length of gap between repayments in the loan schedule. This study finds that clients repaying their loans monthly invested more in their businesses and earned higher income, compared both to those who repaid weekly and to those with an irregular payment schedule. JEL Codes: G12, D12, O16, O12

Influence of Joint Liability on Enterprise Development of Rural Women in Nyamache Sub-County, Kisii County, Kenya

Group lending has received great attention from economists and policymakers for its successful credit delivery to poor borrowers and its role in alleviating poverty in developing countries. The success of group lending in providing credit to poor borrowers has been attributed to its ability to mitigate the asymmetry of information and enforcement problems in credit markets. The ability of group lending institutions to overcome the asymmetry of information and enforcement problems has been theorised to be the driving force behind their outreach to the poor, their sustainability, and their repayment performance. While there is a host of theoretical models explaining the success of group lending, empirical research has lagged behind. The focus of this study was to explore the determinants of group lending mechanisms on the enterprise development of rural women in the Nyamache sub-county, Kenya. The study targeted the rural women development groups that access loans as a group within Nyamache Sub-County. The total target population comprised 781 members, and by using Krejcie and Morgan’s table of determining sample size, the sample size consisted of 260 respondents. Questionnaires were used. The questionnaires were edited first for accuracy and completeness. The study used frequency distribution and percentages and computer software-Statistical Package for Social Scientists version 22 (SPSS v 22) as a tool for analysing data and establishing relationships between variables. The study established that joint liability, training, group representation and loan size positively and significantly influenced enterprise development

Economic Empowerment of Tribal Women Artisans of Malkangiri through Micro-finance and Micro-credit – A Suggestive Growth Model of Sustainability

Empirically, empowerment denotes a degree of autonomy and selfdetermination enabling the people to represent their interest by acting on their own authority and power to control their lives, while sustainability generates the ability to maintain a balance between the need and avoids the depletion of natural resources for the balanced economic growth, thought for social-wellbeingand attention for the need of future generations.Enterprising the two in development philosophy, Amartya Sen’s Capability Approach acclaims that the poverty has its roots in the deprivation of basic capabilities, not due to the a consequence of low income. Through inclusive welfare approach, the development perspective provides people greater freedom and choice to increase capabilities; to focus not only on the means but also on people's ends, and on the freedom (constitutive and instrumental) needed to satisfy these ends. Microfinance and micro-credit are in the one instrumental freedom that involves access to credit and capital for the poor borrowers lacking collaterals. The paper is an humble attempt of research on the excluded tribal women artisans of Malkangiri and their basic threshold of capability as the central social goal for their inclusive development. Investigating the observations, the present study aims to examine the level of women's empowerment, as promoted by the introduction of micro-finance and micro-credit programs, in one of the least developed districts of India - Malkanagiri, in Odisha; and thereafter, it proposes a sustainable suggestive growth model based on the findings.

Influence of joint liability on enterprise development of rural women in Nyamache Sub-County

Group lending has received a great attention from economists and policymakers for its successful delivery of credit to poor borrowers and its role in alleviating poverty in the developing countries. The success of group lending in providing credit to poor borrowers has been attributed to its ability to mitigate the asymmetry of information and enforcement problems in credit markets. The ability of group lending institutions to overcome the asymmetry of information and enforcement problems has been theorized to be the driving force behind their outreach to the poor, their sustainability, and their repayment performance. While there is a host of theoretical models explaining the success of group lending, empirical research has lagged behind. The focus of this study was to explore the determinants of group lending mechanism on enterprise development of rural women in Nyamache sub-county, Kenya. The questionnaires were edited first for accuracy, and completeness. The study used frequency distribution and percentages, and computer software-Statistical Package for Social Scientists version 22 (SPSS v 22) as a tool of analyzing data, and to establish relationships between variables. The study established that, joint liability, training, group representation and loan size positively and significantly influenced enterprise development. The study recommends that; women groups should be strengthened so that they can be in position to jointly access loan for the development of their enterprises, the women groups lending group should organize effectively trainings so as to equip the members with capacity to efficiently manage their business enterprises, the women lending group should share the lending policies with members to understand them foe easy of operation and to minimize misunderstanding and any arising conflict and that the women lending groups should effectively vet group members to enable them access maximum qualified amounts so as they could invest in their businesses for survival and growth.

Evaluating the role of microfinance institutions in enhancing the livelihood of urban poor

PurposeThe goal of this research is to look at how urban microfinance affects livelihood transformation in terms of poverty reduction, living standards, social well-being, empowerment and entrepreneurship.Design/methodology/approachThis paper analyses the role of urban microfinance towards livelihood with special reference to Western Uttar Pradesh. Primary data were collected from 321 respondents who are users of a microfinance programme using a standardised questionnaire. The data were collected using a stratified random sampling technique, and the data were analysed using structural equation modelling.FindingsUrban microfinance has a considerable impact on poverty reduction, the standard of living, social well-being, empowerment and entrepreneurship in the urban poor, according to the findings.Research limitations/implicationsThe fact that the majority of the borrowers were uneducated was the most significant barrier to them filling out the questionnaire. Their anxiety was the most significant psychological obstacle to successfully answering the questions, and it took time. As a result, it is urged that proper counselling be conducted before the poor borrowers fill out the questionnaire.Practical implicationsThe current study highlights the factors that lead to the utilisation of microfinance services. This research will aid MFIs in selecting the appropriate products and services for the urban poor. The results of this study will aid them in understanding and meeting the expectations of microfinance CEOs.Originality/valueThis is a first study conducted in Northern zone of India measuring the roles urban microfinance institutions (MFIs) in uplifting the livelihood of urban poor.

Effectiveness of Microfinance Based on Rational Mechanisms

This study examines the factors that determine whether microfinance borrowers borrow after being allocated individual and group loans through randomization in Mongolia. Efficiently increasing income and consumption through microfinance requires knowledge of the attributes that lead to borrowing and that increase income and consumption, by type of microfinance. The use of MTE reveals the heterogeneity of the borrowers. The results of MTE can help to design effective microfinance policies. The examined outcomes were the impacts on household income, business income, business expenditure, consumption, and food consumption. Furthermore, we investigated the impact on the poorest borrowers and obtained results that took into account the borrowing ratio instead of the borrowed amount. The analysis revealed the following results: first, there are borrowers who actively borrow and those who do not, and their characteristics are shown by microfinance type; second, there are different types of microfinance suitable for different borrowing purposes; third, a comparison between the poorest and less poor borrowers reveals different types of suitable microfinance; fourth, the attributes that increase income and consumption through borrowing differ for different groups. Group lending increases business income and business spending but reduces consumption. It was confirmed that when narrowing the sample to the poorest, the effect of increasing group lending was lost, but consumption increased. There are many cases in which the outcome increases in individual lending, but decreases in group lending, and vice versa.

Islamic Financial Literacy and Its Effects on Intention to Use Islamic Bank

Introduction: Islamic finance in Indonesia has a rapid development in this millennial era. Islamic bank is starting to become an option. Islamic financial literacy has an important role for peoples, not least by students. Student as young generation will have a long future and must have the ability of financial skills. If someone takes a decision wrongly then it will result in a lack of retirement planning and poor borrowing behavior. Purpose/Objective Study: The aim of this study focuses on measuring the level of Islamic financial literacy, exploring the effects of the hopelessness, religiosity and financial satisfaction on Islamic financial literacy, and determining the effects of Islamic financial literacy on intentions to use Islamic banks among students. Design/Methodology/Approach: The models being used are simple and multiple regression with ordinary least square method. 376 students samples are taken from Islamic universities in Yogyakarta. Findings: The results proved that students have a high Islamic financial literacy, hopelessness has a negative and insignificant effect while religiosity and financial satisfaction have positive and significant effect toward Islamic financial literacy. The whole model has significant effect toward Islamic financial literacy. This study proved that Islamic financial literacy has a positive and significant effect on the intention to use Islamic bank. Article Type : Research Paper

Using evaluation data to predict loan performance among poor borrowers: The case of BRAC’s asset transfer and microcredit programmes

SummaryMotivationAnti‐poverty programmes can work as a comprehensive data source of poor households’ economic behaviour and performance, a resource that is particularly scarce in environments without formal credit scores or households that have minimal involvement in economic activities.PurposeThis study examines the potential role of information generated by an anti‐poverty programme on self‐selection by borrowers (i.e., applying for a loan), screening applicants by lenders (i.e., loan approval), and borrower performance in the microcredit market.Methods and approachWe apply the logistic regression, Least Absolute Shrinkage and Selection Operator (LASSO), and Random Forest (RF) methods to predict self‐selection, screening, and post‐loan outcomes.FindingsWe show that the rate of accurate prediction is about 70% for self‐selection and screening. We find that the prediction accuracy rate is 68% for productive use and 91% for repayment difficulty. Objective indicators (e.g., income, assets, age of the household head, savings) stand as the most influential predictors of self‐selection, screening, and post‐loan outcomes.Policy implicationsDevelopment programmes can improve availability of data needed to predict creditworthiness, suggesting that there could be potential to expand credit access among poor borrowers through partnerships between development agencies and financial institutions.

Understanding “Riba” (interest): the religious and the rational

Learning outcomes The case explores Ayesha’s reasoning, who is also a financial expert, regarding how she approaches the question of Riba (interest) so that she can maximize her financial returns and remain true to her religious identity. The discussion in the case revolves around alternate rationalizations as to why Riba (interest) continues to remain important for many Islamic investors. Case overview/synopsis Historically, the prohibition of Riba (interest) prevented the exploitation of the poor borrower who was charged exorbitant interest rates by wealthy lenders. In the modern day, a banking system which operates in a regulated setup and charges market-based interest rates, the rationale regarding the exploitation of the poor seems less compelling. Furthermore, other economic realities such as inflation and currency fluctuations further lend support to protecting one’s investments through prudent financial decisions. In this case the authors approach this decision regarding the prohibition of Riba (interest) in Islam from the point of view of the protagonist, Ayesha Bhatti, who is religiously conscious and is faced with certain personal investment choices. Complexity academic level The case focuses on one of the core issues of Islamic finance (IF), that of the prohibition of charging Riba (interest) on debt and the reasons behind this ruling. The relevance of this prohibition to modern day financial markets is essential to understand IF. Supplementary materials Teaching notes are available for educators only. Subject code CSS 1: Accounting and Finance.

Contractual Restrictions and Debt Traps

Abstract Microcredit and other forms of small-scale finance have failed to catalyze entrepreneurship in developing countries. In these credit markets, borrowers and lenders often bargain over not only the interest rate but also implicit restrictions on types of investment. We build a dynamic model of informal lending and show this may lead to endogenous debt traps. Lenders constrain business growth for poor borrowers, yet richer borrowers may grow their businesses faster than they could have without credit. The theory offers nuanced comparative statics and rationalizes the low average impact and low demand of microfinance, despite its high impact on larger businesses.

Testing Efficiency, Size, Productivity and Capital Structure of Microfinance Institutions (MFI’s) of Pakistan

The aim of the study is to test the impact of efficiency, productivity, size and profitability of microfinance institutions on capital structure in microfinance sector. For this, micro finance NGO’s are selected to infer and specifically seven NGO’s (e.g. Kashf, Safco, Damen, CSC, Akhuwat, Opp and Assassah) were selected.The data is obtained from annual financial statements of these organization ranging 2005-2019 (t = 15 years). For analysis, regression analysis technique is applied and unit root test is applied to check data stationary. We found role of size and efficiency significant in determining capital structure and productivity insignificant. Planning and implementation mechanism on key performance indicators (KPI’s) is suggested to maximize productivity of micro finance institutions. Strategic flexibility is another important aspect to reconsider and bring into operations to enhance productivity. The results of the study will help to know that how such antecedent’s affects capital structure in micro finance sector for performance concern. It will also help to understand psyche of poor borrowers in Pakistan in borrowing. This research is original for theorists, scholars and practitioners and this concept is also important for organizations to know the alarming outcomes when capital becomes adequate and entire cycle moves adversely when funding sources are very less.

Designing sustainable Islamic Microfinance to enhance the accessibility of poor borrowers in Indonesia: an appreciative intelligence approach

This paper provides a sustainable Islamic microfinance design using an appreciative intelligence approach to enhance the poor borrowers’ accessibility to micro financing in Indonesia. This study aims to identify problems faced by BMT in Indonesia and find the solution to implement sustainable Islamic microfinance. It uses a qualitative analysis by adopting an appreciative intelligence approach. Data was collected by interviewing the Chairman and officer of Central BMT (Induk Koperasi Syariah), Jakarta in 382 BMT’s throughout Indonesia. The steps: (i) reframing problems into possibilities, (ii) appreciating the positive meaning and promise of every being, experience, situation, and (iii) linking the generative strength of the present with the preferred vision. The results show that BMT faced four problems in implementing sustainable Islamic microfinance, namely lending limit regulation, high funding pricing to the borrowers, APEX BMT realization, and productive use funding. Several solutions have been suggested by using the appreciative intelligence approach. This paper adds to the literature on Islamic microfinance by enabling researchers and practitioners to apply the appreciative intelligence model of sustainable Islamic microfinance. It also contributes towards enriching the knowledge in the Islamic microfinance and sustainable Islamic microfinance.

State of Civil Society and NGOs in Bangladesh: Examining the Recent Trends and Changes

This paper is the outcome of a revisit study conducted in 2016 in three locations of two districts in Bangladesh. The original and/ or the 1st study was conducted in the same locations using same objectives and methods in 2005. The main purpose of the revisit study was to perceive the changes taken place in relation to the civil society space and activism, and the state of activism of NGOs. Qualitative approaches were used in collecting primary data from field and secondary sources were also used. The revisit study finds that NGOs are increasingly offering support to non - poor borrower groups, and today less emphasis is placed on offering small loans to the disadvantaged. The provision of larger loans (than the micro-credit loans encountered earlier), support to small businesses, and the appearance of migration support loans. In other respects, civil society space has been reduced in 2016. In 2005 we found rights-based works on the road to room for maneuvering, such as legal aid, we also found a civil society had been more politically focused, with the power to influence local officials in some cases. The 2005 study also found that with various civil society actors (services, rights, social mobilization and advocacy) a kind of dynamism in the stage, there was an opening of space indeed. On the other hand, the revisit study 2016 observed the shrinking state of civil society space. Rights-based NGOs and informal civil societies are at significantly reduced state; and it was found the social mobilization by the non-government organizations and agencies has a very slim opportunity to reinstall their activities in civil society space in near future. Extreme political control over institutions and citizens’ rights-based activities may be attributed as the main reasons of halting civil society action in Bangladesh.

Banker my neighbour: Matching and financial intermediation in savings groups

Efforts to promote financial inclusion have largely focused on microcredit and micro-savings separately, less so on promoting financial intermediation across poor borrowers and savers. Village Savings and Loan Associations (VSLAs) may enable borrowers and savers to meet each others' needs, by combining a borrowing and a commitment savings technology. On the other hand, frictions such as imperfect information and enforcement may limit VSLAs’ ability to attract both borrowers and savers into the same group. To investigate whether VSLAs provide effective financial intermediation, we use a large-scale survey of mature VSLA groups in rural Malawi. We find that VSLAs mobilize large quantities of savings that are then lent to individual members at high interest rates, yielding savers a large return on their savings. We examine whether this process is assisted by the sorting of members across VSLAs. We find that present-biased individuals tend to group with time-consistent members, consistent with the hypothesis that the former gain a commitment savings technology by lending to the latter. In contrast, members of the same occupation sort into groups together, indicating unrealised intermediation possibilities between farming and non-farming households. This has implications for the design of such groups.

Contractual Restrictions and Debt Traps

Microcredit and other forms of small-scale finance have failed to catalyze entrepreneurship in developing countries. In these credit markets, borrowers and lenders often bargain over not only the interest rate but also implicit restrictions on types of investment. We build a dynamic model of informal lending and show this may lead to endogenous debt traps. Lenders constrain business growth for poor borrowers yet richer borrowers may grow their businesses faster than they could have without credit. The theory offers nuanced comparative statics and rationalizes the low average impact and low demand of microfinance despite its high impact on larger businesses.

Impact of Competition on Social Performance of MFIs: Comparative Analysis of India and Bangladesh

Although studies encompassing the different aspect of microfinance like sustainability of microfinance institutions (MFIs), role of microfinance in poverty alleviation, etc., have enriched the literature from time to time, studies on competition and its impact on social performance of MFIs are scarce. There also exists lacking consensus as to how can competition influence MFIs’ social performance. The empirical evidence reveals duality of opinion. With information asymmetry, competition enhances borrowers’ indebtedness and lowers expected loan repayment and impeding loan quality. Furthermore, in order to overcome these problems, MFIs would engage in more screening that raises their operational costs. This encumbers the sustainability of MFIs. Thus, the socially oriented MFIs, in order to remain sustainable, start targeting the less poor borrowers. But the other view holds that as competition intensifies, it provokes the MFIs to remain committed with the social objective and to strive to retain the clients. The theory on impact of competition on the social performance of MFIs may be either positive or negative, which calls for further investigation. Against this backdrop, this article attempts to assess the impact of competition on social performance of MFIs in India and Bangladesh. The study is conducted over 53 MFIs from India and 20 MFIs from Bangladesh on which a complete set of data is available. The study period is confined to 9 years from 2009 to 2017. In order to establish the association between competition and MFIs’ social performance, panel data regression is used. The study takes into account the depth and breadth of outreach as the dependent variable. The study uses panel data regression to establish the association between competition and social performance of MFIs. The empirical analysis reveals that competition has no significant association with any of the measures of social performance. This implies that social performance in the sector is explained by other factors. Amongst the country-specific variables, it is clear from analyses that gross domestic product (GDP) and inflation are important determining factors of MFIs’ social performance. Country of origin (COO) of the MFIs is one of the determining factors for social performance as it is found to be significant for three out of the four models. It is also evident from the analyses that Bangladeshi MFIs have a greater impact on MFIs’ social performance in terms of outreach in comparison to Indian MFIs. While for percentage of female borrowers (PFB), Indian MFIs account for greater depth of outreach in comparison to Bangladesh.

IMPACT OF MICROCREDIT ON INCOME AND NON-INCOME DIMENSIONS OF POVERTY – A STUDY ON DIFFERENT GROUPS OF POOR IN BANGLADESH

This study investigates the differential impact that microcredit borrowers of different income classes might have experienced in their poverty condition after borrowing microcredit loans. Methods of this study consisted of a cross-sectional survey as well as unstructured interviews with the female microcredit borrowers in Bangladesh. Results show that an overwhelming majority of microcredit borrowers has experienced improvement in their poverty condition, but the degree of benefits widely varies among different groups of borrowers. Borrowers with some resource base have been benefitted most; whereas the absolute poor borrowers, with hardly any asset holding, not only have experienced least improvement in their financial condition but also have become even poorer in few instances. Article visualizations: