The effect of agriculture on repayment efficiency: a look at MFI borrowing groups

Abstract

There is a widely held industry assumption from microfinance institutions that agricultural loans have poorer repayment rates, which has resulted in many loans being provided for small businesses as opposed to agricultural purposes. Using data from a sample of 100 borrowing groups from a south Indian Microfinance Institutions (MFI), this study challenges this belief by analyzing the repayment efficiency of borrowing groups and reflects on the implications for agricultural microfinance loans. The analysis is run using Bayesian stochastic frontier estimation with an exponential hierarchical prior on the efficiency term. Our results indicate that the average efficiency of the borrowing groups analyzed was approximately 75% and that having a higher percentage of agricultural loans increased borrowing group efficiency while gains in efficiency also rose as the size of the borrowing group increases.

Progressive Lending in Microfinance—What about the Farmers?

“…The negative coefficient of the farmer dummy indicates that farmers generally have a lower probability for late payments confirming the results of the t-test in Table 5. This is in line with Raghunathan et al (2011), Vogel (1981 and Weber and Musshoff (2012).…”

“…By also considering the repayment performance over the course of repeated borrowing, we analyze how relationships with farmers and non-farmers pay off for the MFI in terms of loan performance. Studies show that farmers demonstrate a better repayment performance (Raghunathan et al, 2011;Vogel, 1981;Weber and Musshoff, 2012), which is reasoned by the higher interest of farmers to create a reliable credit history owing to the generally limited financial assistance in rural areas (Vogel, 1981). In contrast, Armend ariz de Aghion and Morduch (2010) argue PROGRESSIVE LENDING IN MICROFINANCE 805 for the case of the micro-borrower, the motivation to feature a satisfying repayment performance generally diminishes with each additional loan.…”

“…However, a number of studies reveal that it is farmers who face relatively greater initial obstacles in terms of loan access since agriculture is associated with higher risk exposition (Petrick, 2004;Weber and Musshoff, 2012;Zeller et al, 1998). Simultaneously, empirical findings indicate that farmers do not necessarily default more often (Raghunathan et al, 2011;Vogel, 1981;Weber and Musshoff, 2012); this inevitably contradicts the perception of higher risk.…”

Do the Heterogeneous Determinants of Repayment Affect Differently across Borrowers of Diverse Credit Sources in Rural Assam? A Double Hurdle Approach

“…Fernaldo (2008) argued that returns in agriculture are not only more volatile but also generally lower than non-farm activities. In addition, Raghunathan et al (2011) recommended that credits for agriculture have poorer repayment rates, because many credits are being provided for small businesses as opposed to agricultural purposes. As expected, FI is highly significant and positively related to rural borrower's ability to repay credit in all sources.…”

Can flexible agricultural microfinance loans limit the repayment risk of low diversified farmers?

“…By applying our second and third DC (II and III), we consider two additional risk measures compared to Raghunathan et al. () and Al‐Azzam et al. ().…”