The Competition between Relationship-Based Microfinance and Transaction Lending

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We find that the quality of ProCredit borrowers who have a transaction loan as well is below average. They also have higher default probabilities. Furthermore, we find evidence that ProCredit customers with payment problems prefer to serve their relationship loan while defaulting on their transaction loan. These findings suggest that customers of a relationship bank value their banking relationship and try to protect it as long as possible. This result stands in contrast to the common presumption that the market entrance of transaction lenders will destroy the market for lenders applying relationship lending techniques. * I am deeply indebted to Gabriel Schor from Banco ProCredit, Frankfurt and the staff of Banco ProCredit Ecuador, Cesar Vinueza and Oscar Villaseca amongst others, for their generous support. Further thanks goes to Eva Terberger, Andreas Roider, Karolin Kirschenmann and seminar participants at the University Heidelberg for many helpful comments and support. Terms of use: Documents in

Evaluating the predictive accuracy of microloan officers’ subjective judgment

“…It can provide a forward view by recognising factors that cannot be reflected in a purely empirical grade, such as project viability or market conditions. The theoretical literature in microfinance has long emphasized that relationship lending approach is particularly well-suited for Microfinance institutions (MFI), which assess opaque SMEs (small and medium enterprises) that do not have audited financial statements or sufficient pledgeable collateral (Petersen & Rajan, 1995;Schrader, 2009;Stein, 2002). The loan officers in MFI are trained to collect and make judgments about information on entrepreneur's personality and entrepreneur's project.…”

Does it (Re)pay to be Female? Considering Gender in Microfinance Loan Officer-Client Pairs

“…Since microfinance loans are characterized by short maturity and high repayment frequency, the extent of the interactions between the client and the MFI is substantial. There is some evidence that, in microfinance, the length and the intensity of the relationship between the lender and the borrower improves access to credit (Behr, Entzian, & Güttler 2011), reduces the time of the loan approval process (Behr et al, 2011), and decreases default rates (Schrader, 2009). However, for all the advantages that it may bring, a close loan officer-client relationship may also have some negative effects, such as the screening out of other qualified clients and risks of fraud (Beisland, D'Espallier, & Mersland, 2019;Godfroid, 2019).…”

Relationship lending in microfinance: How does it impact client dropout?

“…As explained by Schrader (2009), MFIs using relationship lending have proven to be successful. There is empirical evidence that relationship lending in microfinance reduces credit rationing (Behr et al, 2011;Chakravarty & Shahriar, 2010;Cornée & Masclet, 2013) and default probabilities (Schrader, 2009).…”

“…Regarding this last point, Schrader (2009), studying microloans in Ecuador, argued that when clients had to decide between repaying their relationship loan or repaying their transactional loan when they faced payment problems, they preferred repaying the relationship loan. Behr et al (2011), when analyzing microlending, found that relationship lending reduced the time between the loan application and the loan approval, the difference being particularly important between the first and the second loan.…”