Provisioning over the business cycle: Some insights from the microfinance industry

Hessou, Helyoth; Lensink, Robert; Soumaré, Issouf; Tchuigoua, Hubert Tchakoute

doi:10.1016/j.irfa.2021.101825

Cited by 14 publications

(4 citation statements)

References 93 publications

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“…The first measure of credit risk, PAR90 , is the proportion of MFI loan portfolios exceeding 90 days overdue. Because MFI loans tend to be issued for shorter terms than those of commercial banks, we also use PAR30 , measuring the proportion of loan portfolios exceeding 30 days overdue (Castellani and Afonso, 2021; Hessou et al , 2021). The third measure of credit risk, ZSCORE , provides an indicator of an MFI’s credit risk relative to its peers (Zamore et al , 2019; Mohamed and Elgammal, 2023a).…”

Section: Methodsmentioning

confidence: 99%

Are donor funds used effectively? An examination of Islamic and conventional microfinance institutions

Mohamed

Elgammal

2023

IMEFM

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Purpose This study aims to compare the nexus between donations to Islamic and conventional microfinance institutions (MFIs) and their credit risk, financial performance and social outreach. Design/methodology/approach The authors use fixed effects and two-step system generalized methods of moments models with internal instrumentation. The analysis is conducted on an international sample of 1,519 MFIs in 55 countries during 1999–2019. Findings Islamic MFIs receiving greater donations experience an increase in credit risk, whereas the opposite occurs among their conventional counterparts. Donations are associated with an improvement in the depth of outreach of Islamic MFIs, allowing them to serve a poorer client base, despite a simultaneous decline in the breadth of their outreach. On the other hand, donations improve both the depth and breadth of conventional MFIs outreach. Donations also exhibit a positive relation with productivity, efficiency and sustainability in conventional MFIs. Practical implications This paper addresses a gap in the literature on Islamic MFIs and their use of donor funds by examining how donations contribute to the quality of their credit portfolios, financial performance and social outreach. This study used Ahmed’s (2012, 2017, 2020, 2021) total factor productivity model to capture the impact of donations on the performance of MFIs. Social implications Donations are found to contribute to positive financial inclusion outcomes for both Islamic and conventional MFIs, a promising implication for society and donors alike. Originality/value This paper addresses a gap in the academic literature on Islamic MFIs and their use of donor funds by examining how donations contribute to the quality of their credit portfolios, financial performance and social outreach.

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Section: Methodsmentioning

confidence: 99%

Are donor funds used effectively? An examination of Islamic and conventional microfinance institutions

Mohamed

Elgammal

2023

IMEFM

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“…Some studies observed a deterioration in the quality of the credit portfolio of MFIs during the 2007–09 financial crisis (Lützenkirchen & Westroffer, 2012; Marulanda et al., 2010), others showed that MFI and bank nonperforming loan (NPL) ratios (Schulte & Winkler, 2019) and risk‐taking behavior (Wagner, 2012; Wagner & Winkler, 2013) followed a similar pattern during the global financial crisis and the immediate post‐crisis period. Other authors have highlighted a negative co‐movement between risk (provisioning) and the business cycle (Hessou et al., 2018). However, no consensus seems to emerge as to the factors explaining the decline of loan portfolio quality (repayment performance) and the increase in risk.…”

Section: Introductionmentioning

confidence: 99%

Loan officer gender and loan repayment performance. Evidence from greenfield microfinance institutions in Cameroon¹

Tchuigoua

2022

Ann Public Coop Econ

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We explore whether loan officer gender affects loan repayment performance in Cameroonian microfinance institutions (MFIs). After controlling for demand‐side factors (borrower characteristics), lending methodology, loan contract terms, year, and industry fixed effects, we apply a pooled probit model to a unique loan‐level dataset including more than 7000 loans approved between 2007 and 2012 by two Cameroonian commercial MFIs. We find that loans granted and monitored by male loan officers perform better than those granted by female officers and that loans approved under joint liability contracts and monitored by male loan officers are less likely to fall into arrears. Our findings also show that the performance advantage of male loan officers over female officers is confirmed only during bad times. Compared to female loan officers, male loan officers seem to intensify their monitoring efforts during a crisis period. The results are robust after controlling for selection bias and are less sensitive to a change in the loan repayment performance measurement.

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“…The magnitude of credit procyclicality could differ depending on banking systems' features such as quality of regulations, supervision, institutions, financial structure and development, as well as macroprudential policy. In spite of a large number of works on the procyclicality of LLPs in a cross-country context (Leaven and Majnoni, 2003;Bikker and Metzemakers, 2005;Soedarmono et al, 2017;Olszak et al, 2017Olszak et al, , 2018Hessou et al, 2021) to the best of our knowledge, there is no prior literature highlighting whether procyclicality of LLP is affected by competition. This paper aims to fill in this gap and investigates whether the competitive environment, which is a natural exogenous determinant of bank activity, affects the procyclicality of loan-loss provisions (henceforth LLPs) in over 100 countries around the world.…”

Section: Introductionmentioning

confidence: 99%

“…, 2017; Olszak et al. , 2017, 2018; Hessou et al. , 2021) to the best of our knowledge, there is no prior literature highlighting whether procyclicality of LLP is affected by competition.…”

Section: Introductionmentioning

confidence: 99%

Procyclicality of loan-loss provisions and competitive environment – a global perspective

Olszak

Kowalska

2022

IJOEM

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PurposeDespite the extensive debate on the impact of bank competition on risk-taking, there is no evidence of its role in procyclicality of loan-loss provisions (LLPs). The purpose of this study is to find out what is the role of competition in the procyclicality of LLPs.Design/methodology/approachUsing over 70,000 bank-level observations in 103 countries in 2004–2015 and the LLPs model, this study interacts competition with business cycle to check what is the effect of competition on procyclicality of LLPs.FindingsThis study finds that intense competition is associated with more procyclicality of LLPs. Increased procyclicality of LLPs in a more competitive environment is binding for high-income countries. The opposite effect is shown for low-income countries.Research limitations/implicationsFuture research can be extended by testing the role of additional factors – such as regulations, supervision or institutional protection of shareholders' rights, in the association between procyclicality and competition.Practical implicationsThe main message of this paper is that the competitive environment changes the procyclicality of LLPs. The results are important from the point of view of the COVID-19 pandemic because government interventions during lockdowns will affect competition in the banking industry and in other industries of the economy.Originality/valueThis paper contributes to the extant research in three dimensions. First, it shows that competition is an important factor behind procyclicality of LLPs. Second, it adds to the research on the links between competition and financial stability. Third, it shows that the link between competition and procyclicality of LLPs depends on the economic development of the country in which the banks are located.

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Provisioning over the business cycle: Some insights from the microfinance industry

Cited by 14 publications

References 93 publications

Are donor funds used effectively? An examination of Islamic and conventional microfinance institutions

Are donor funds used effectively? An examination of Islamic and conventional microfinance institutions

Loan officer gender and loan repayment performance. Evidence from greenfield microfinance institutions in Cameroon¹

Procyclicality of loan-loss provisions and competitive environment – a global perspective

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Provisioning over the business cycle: Some insights from the microfinance industry

Cited by 14 publications

References 93 publications

Are donor funds used effectively? An examination of Islamic and conventional microfinance institutions

Are donor funds used effectively? An examination of Islamic and conventional microfinance institutions

Loan officer gender and loan repayment performance. Evidence from greenfield microfinance institutions in Cameroon1

Procyclicality of loan-loss provisions and competitive environment – a global perspective

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Loan officer gender and loan repayment performance. Evidence from greenfield microfinance institutions in Cameroon¹