Franchising Microfinance*

Abstract

Financial intermediaries worldwide are seeking mechanisms for participating in micro lending.We consider a simple model where a bank may use informed "local capitalists" as intermediaries for on-lending. But the availability of multiple credit sources provides borrowers with an incentive to default voluntarily, making the bank's on-lending mechanism a non-starter. We explore whether a coalition of local capitalists, effectively limiting borrower's opportunity for defaulting multiple times, might be sufficient to facilitate on-lending. Instead, we find that a monopoly moneylender with superior enforcement technology can out-compete the local capitalist coalition if the moneylender also enjoys the smallest transactions costs of lending. We show that a credible competitive threat to the monopoly moneylender can only arise if the local capitalist coalition can also be made cost-effective either by direct subsidies or by measures such as standardization, economies of scale and implementation of best practices. We argue that Franchising is one potential mechanism that could deliver both cost-efficiencies as well as ability for local capitalists to form a coalition. JEL Classification: G21

Joint-liability with endogenously asymmetric group loan contracts

“…In this respect, our paper rationalizes the widely applied group leader practice of microfinance programs as the efficient outcome of an optimal lending contract. As highlighted by Bubna and Chowdhry (2010), financial intermediaries all around the world are seeking profitable mechanisms for participating in micro lending. We shed light on particular contractual terms that would help microfinance intermediaries to raise loan repayment performance.…”

Funding Strategy and Performance of Microfinance Institutions: An Exploratory Study

“…The number of poorest clients who, for the first time, have benefited from access to financial services offered by MFIs also grew from 8 million to 138 million. During this period, MFIs achieved their promise of helping the poor rise out of poverty through the services they offer (Bubna and Chowdhry, ). One explanatory factor for MFIs’ success is their access to diversified sources of external financing at better conditions.…”