Recent advances in lending to the poor with asymmetric information

International audienceMicrofinance institutions have successfully extended unsecured small loans to poor and opaque borrowers at the bottom of the economic pyramid. This success is largely due to innovative financial contracts that impose joint liability and create dynamic incentives to mitigate the effects of asymmetric information. Given recent advances in microfinance contracts, there is a need to map the theoretical developments. This paper aims to accomplish that, by performing a critical literature survey of microlending contracts, focusing on joint liability and dynamic incentives, bringing out some of the deficiencies of contract-theoretic propositions that cannot effectively account for the social mission of microfinance

Focus on... Microcredit contracts

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From Group Lending to Lending by a Group

Abstract Theoretical models of microcredit have focused on single lender settings with monopolistic MFIs. In practice however, multiple banking relationships are ubiquitous. In this paper we develop a theoretical model with multiple players on the supply side of microcredit to explain the workings of modern microcredit industry

A methodology for the assessment of potential demand and optimal supply of entrepreneurial microcredit

We propose a methodology for the assessment of potential demand and optimal supply for microcredit. We show that the total demand is a combination of the demand that stems from the active poor plus the demand generated by a motivator agent among the entrepreneurial non-motivated poor. We use French data to provide an illustration of the assessment of potential demand for microcredit. We also show that the proportion of the potential demand satisfied by a microfinance institution depends on its objective i.e. either it is socially oriented or a profit maximizer

Do Microloan Officers Want to Lend to the Less Advantaged? Evidence from a Choice Experiment.

The mission of microfinance is generally perceived as compensation for the failure of the mainstream financial institutions to deliver access to finance to the poor. Microloan officers have significant influence on microloans allocation as they contact loan applicants and process information inside microfinance institutions (MFIs). We conduct a choice experiment with microloan officers in Burundi to determine which clients are preferred for microloan allocation and whether the less advantaged are indeed targeted. The results suggest that the allocation of microloans is slightly in favor of the less advantaged, whereas the main determinant is the quality of the applicants' business projects. Somewhat surprisingly, we find only small differences in the determinants of the targeted groups between non-profit and profit-seeking MFIs