Why microfinance institutions exist: lending groups as a mechanism to enhance informational symmetry and enforcement activities

Abstract

I n this paper, we focus on the economic motivation for the existence of microfinance institutions (MFIs). In doing so, our study contributes to the debate regarding why MFIs exist and, especially, what mechanisms are used to address the risks associated with their operation. In examining the reasons why some individuals are regarded as "non-bankable", we lay out the basic economic logic that motivates the exclusion of this population from formal credit markets. Next, we show how the lending group methodology overcomes the credit dilemma which sustains and increases the exclusion of the poorest from these formal credit sources. Through this, we point out the microfinance founding mechanisms: the increase of both informational symmetry and enforcement capacity of MFIs through the enhancement of their screening, monitoring and enforcement activities. We also highlight the importance of context and gender for the success of lending groups. Finally, we analyze these mechanisms in the Brazilian context. Keywords

Multilevel latent class modeling to segment the microfinance market

“…Marconatto et al . (2017) found four major factors that helped microfinance to achieve the desired results and become an important tool in the fight against poverty: group-based lending, self-selection or peer selection (the groups form spontaneously), each operation has its own specific characteristics and incentives.…”

“…The primary goal of microfinance institutions (MFIs) is to generate social welfare, prosperity and sustainable development by hastening financial development and reducing poverty, and by stimulating economic growth through entrepreneurial initiative (Khavul, 2010; Amin et al , 2017). This can only be achieved because MFIs use social collateral to contain the risk of lending money to poor people (Marconatto et al , 2017; Dowla, 2006). This social collateral relies on group-based lending methods, building on trust and commitment, and this enables financial services to be offered to consumers previously excluded by formal banks (Giné and Karlan, 2014; Dowla, 2006).…”

The Impact of Micro-finance on Self-employment and Poverty Reduction: A case of Sindh Rural Support Organization and Tameer Micro Finance Bank, Sindh

“…Poverty and Self-employment. Here Reduction of Poverty author has narrated that various variable including increase in assets, education of children and housing suggested by (Marconatto, Cruz, Moura, & Teixeira, 2017) (Datta & Singh, 2019) also and in self-employment some of variable like stating and expansion of business, covering-up business expenses and stating livestock and agricultural activities etc.…”