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

Information, the Cost of Credit, and Operational Efficiency: An Empirical Study of Microfinance

“…We present clear evidence that rating agencies promote microfinance, and in this way we contribute to the large and growing general microfinance literature (e.g., Brau and Woller (2004), Armendariz de Aghion and Morduch (2005), Karlan (2005), Khandker (2005), Bubna and Chowdhry (2007) and Karlan and Zinman (2009)). One central issue in the microfinance literature is the tension between those focused on securing the financial viability of MFIs and those who argue that emphasizing purely financial goals will lead MFIs to depart from their basic social mission of reducing poverty (Morduch (2000)).…”

Improving Access to Banking: Evidence from Kenya*

“…Given the high transaction costs of lending small amounts, most commercial banks are incapable of extending credit profitably and, therefore, view the sectors targeted by MFIs as 'unbankable,' while moneylenders generally charge usurious rates of interest. In view of these problems, Bubna and Chowdhry (2010) propose a model of financial inclusion based on the use of information available within the local population, a model that to some extent is being exploited by domestic banks such as the one we study, Equity Bank in Kenya.…”

Credit Default Swaps and Bank Regulatory Capital*

“…Given the high transaction costs of lending small amounts, most commercial banks are incapable of extending credit profitably and, therefore, view the sectors targeted by MFIs as 'unbankable,' while moneylenders generally charge usurious rates of interest. In view of these issues, Bubna and Chowdhry (2010) propose a model of financial inclusion based on the use of information available within the local population, a model that is being exploited by domestic banks, such as Equity Bank in Kenya. 1 Gaps in access to financial services for some market segments are an indication of financial exclusion.…”