The Impact of High Microfinance Growth on Loan Portfolio

Abstract

Most empirical studies in microfinance have disproportionately focused on its downstream effects-effects on the borrower-leaving the important question of how microfinance institutions are affected in the process, largely unanswered-upstream effects. This paper addresses this question by using panel data estimations to empirically investigate the causal effect of microfinance growth on microfinance institution loan portfolio quality. Surprisingly, we find evidence that portfolio quality improves with growth in outreach, which is contrary to the dominant view that higher growth leads to increased default risk. This result is robust across estimation methods and even after controlling for microfinance institutional characteristics and macroeconomic indicators.1 These microfinance markets are Nicaragua, Morocco, Bosnia and Herzegovina (BiH) and Pakistan. 2 MFIs are different from one another in size, culture and other aspects. An MFI can burgeon from institutions such as banks, cooperatives and non-governmental organizations just to name a few. 3 We also estimated our model during the boom years (not presented in this paper) and found results similar to post-boom estimations. 4 The most recently available data are for year 2013. 698 J. Yimga 6 The four other performance areas are (i) outreach: breadth (number of clients served); (ii) outreach: depth (client poverty level); (iii) financial sustainability (profitability); and (iv) efficiency.Microfinance Growth and Loan Portfolio 701

Riskiness of lending to small businesses: a dynamic panel data analysis

“…Credit risk in MFIs is also affected by the growth in loan portfolio. Contrary to expectations, Yimga (2016) finds that portfolio quality improves with the growth in gross loan portfolio. In contrast, Gonzalez (2010) establishes a weak relationship between portfolio quality and growth in loan portfolio.…”

“…In the area of microfinance, evidence indicates that gender (D'espallier et al, 2011;Schmit and Marrez, 2010), growth in gross loan portfolio (Gonzalez, 2010;Silva et al, 2015;Yimga, 2016), lending approach (Crabb and Keller, 2006) and economic shocks (Gonzalez, 2007;Sainz-Fernandez et al, 2015) significantly affect credit risk. Loan default rates are lower among female clients compared to their male counterparts.…”

“…In 2000, the state of Andra Pradesh in India faced a microfinance crisis sparked by excessive lending. This was accompanied by many cases of suicide and overzealous regulation by the government (Mader, 2013;Yimga, 2016).…”

“…As lending to small businesses is always of greater concern because of the higher levels of perceived risk due to their opacity (Berger and Udell, 1998;Cole et al, 2004;Hyytinen and Pajarinen, 2008), could increased lending to small enterprises explain this trend? Some of the related hypotheses that have been tested in the area of microfinance include: the view that women are better credit risks compared to men (D'espallier et al, 2011;Schmit and Marrez, 2010); the idea that group dynamics mitigate risk (Crabb and Keller, 2006); the assertion that microfinance is not vulnerable to macroeconomic shocks (Gonzalez, 2007); and the conjecture that aggressive lending strategy is risky (Gonzalez, 2010;Sainz-Fernandez et al, 2015;Yimga, 2016).…”

Doing Good by Doing Well? Microfinance, Self‐Regulation and Borrowers' Over‐indebtedness in the Dominican Republic

“…() mention market penetration as one of the roots of the over‐indebtedness crises. By contrast, Yigma (), using a dataset of 953 MFIs, concludes that higher growth does not lead to increased default risk; inversely, it improves portfolio quality.…”