Microfinance: Interventions in Challenging Contexts

Table of Contents

1. Frontmatter

2. Introduction

   1. Frontmatter

   2. An Introduction to Microfinance: Intervention in Challenging Contexts

      Ana Paula Matias Gama, Mário Augusto, Fábio Duarte, Ricardo Emanuel-Correia

      Abstract

      This book emerges within the context of the project “The role of microcredit in promoting financial and social inclusion” (funded by FCT-Fundação para a Ciência e a Tecnologia, I.P., Project PTDC/EGE-OGE/31246/2017), with the purpose to shed light on the microfinance and entrepreneurial finance puzzle, particularly on the outcomes of microfinance (and microcredit in particular) for its clients and the access to credit conditions they face, without overlooking the need to evaluate the financial sustainability of microfinance institutions (MFIs) and their social mission. This book brings new insights into the effectiveness of microcredit as a tool for promoting entrepreneurial activities that may in turn empower individuals living in extreme poverty and vulnerable conditions across several dimensions of human development in the challenging times faced by both individuals and the microfinance industry. The book is organized in three parts, encompassing eighteen chapters. Part I “Financial system and Institutionalist approach” with seven chapters focuses the supply side of microfinance, namely the economic efficiency, financial performance, and sustainability of the market and MFIs. Part II “Poverty lending and welfarism approach” with five chapters emphasizes the analysis of the demand side of microfinance, that is, on the microfinance effects on individuals, assessing microfinance outcomes in challenging contexts, namely their social outreach, and their impact assessment, mainly through qualitative approaches. Finally, Part III “Generalists studies” encapsulates five chapters offering a financial perspective on microfinance access, credit conditions of financial intermediation, and microcredit performance. This book in turn contributes to academic research by stimulating investigations into new borders between microfinance and entrepreneurial finance and social entrepreneurship, which remain rather scarce. In terms of societal impact, this book briefs a set of contributions that address the specific Sustainable Development Goals (SDG) in the microfinance market of eliminating extreme poverty (SDG1), promoting shared economic growth (SDG8), and reducing the inequalities among countries (SDG10).

3. Financial System and Institutionalist Approach

   1. Frontmatter

   2. Analysing the Financial Performance of Microfinance Mutual Funds

      Carmen-Pilar Martí-Ballester

      Abstract

      Microfinance institutions that were originally non-governmental organizations-managed institutions are turning into profit institutions that require external financial resources in addition to retained profits and deposit collection. Microfinance mutual funds could play an important role in funding microfinance institutions and microentrepreneurs, whether they can generate wealth for their investors. Therefore, the objective of this study is threefold. First it analyses the financial performance of microfinance mutual funds investing in global and global emerging geographical markets. Second, it examines the effect of the COVID-19 pandemic crisis on fund financial performance. Third, it studies the effect of ethical screening for managing microfinance fund portfolios on their financial performance. We have information on 98 microfinance mutual funds from March 2003 to December 2021. We adopt a multi-index model for this sample. Our results indicate that some microfinance mutual funds can beat the market benchmark, achieving better financial performance in non-crisis than in crisis periods. The adoption of ethical criteria in portfolio management reduces funds’ financial performance. However, during the COVID-19 pandemic, global ethical microfinance mutual funds perform better than their conventional counterparts and ethical microfinance mutual funds investing in global emerging markets.

   3. The Economic Efficiency of Microfinance Institutions: Evolution Over Time and Explicative Factors

      José L. Fernández Sánchez, Myriam García-Olalla, Elisa Baraibar-Diez, María D. Odriozola

      Abstract

      Microfinance institutions (MFIs) play a vital role in extending credit to poorer borrowers who are marginalized by the traditional banking system, contributing significantly to reducing poverty and providing economic opportunities to poor people in different countries around the world. The achievement of social goals does not preclude the search for financial efficiency, so demonstrating financial viability has become a priority for these institutions. The objective of this chapter is to analyze the evolution of MFIs’ economic efficiency over time and to explore the effect of different factors on it. The methodology that we have employed is the stochastic frontier analysis (SFA) which allows us to estimate a translog frontier cost function with an unbalanced panel of 1,580 MFIs from different geographic regions for the period 2003–2018. The results reveal that MFIs’ economic efficiency, on average, decreased during the period in all geographic regions, with a lower decrease in the South Asia and Middle East & and North Africa regions. Any relationship between MFIs’ experience and cost efficiency was not found. On the other hand, we have found that the proportion of borrowers in rural areas as well as village banking practices positively influence cost efficiency, whereas MFIs with higher default rates and larger scale are economically less efficient.

   4. Assessing the Performance Profiles of Microfinance Institutions: New Insights into the Management of Their Double Bottom-Line

      Isabelle Piot-Lepetit

      Abstract

      Microfinance institutions (MFIs) deal with a double bottom line and often strive to maintain a balance. This paper investigates a network of MFIs that serves poor populations in rural Cameroon and explores the link between MFI performance and the network structure, by means of the contingency and fit theories and the Data Envelopment Analysis (DEA) approach. By looking at the organizational design of the network and the double bottom-line management issue of its MFIs, results show that the most performing efficient MFIs require less control from the network management team and are important contributors to the exploration of new solutions and services while dealing with a trade-off regarding their social activity. On the contrary, MFIs that have recently launched their activity and need more supervision from network managers greatly benefit from the exploitation of knowledge available within the network, while dealing with a trade-off as regards their financial activity. Between those two extremes, MFIs are deploying their activity with a balanced double bottom line. Transitory imbalances can therefore be considered as opportunities for exploration, by sustaining performance and fostering growth within the network, thus opening new insights into how observed trade-offs between the financial and social activities of MFIs should be considered.

   5. Factors Influencing Loan Delinquency in Microfinance Institutions: A Literature Review

      Farah Naz, Tooba Lutfullah, Saleen Pervaiz, Muhammad Ishfaq Ahmad

      Abstract

      Microfinance institutions (MFIs) constantly face delays in their collections and in many cases, not receiving money or loans that were lent within the stipulated period. Most of these micro lending was arranged without collaterals and thus delinquency, which is a delay in payment initially and later a loan default, has become a propensity in micro financing. This study explores factors that lead to delinquency and categorizes them in internal, external, and natural. Internal factors include business type, interest rate, loan size, inadequate appraisal process, and extent of monitoring and mismanagement of loans by the MFIs. External factors relate to legislative issues, geopolitical and economic situations, while natural factors arise due to weather and climate change that affect borrowers’ agricultural products and services, production and supply chains, natural disasters, and the borrowers’ poor health or sudden death. We conduct a comprehensive literature review that led to causes and factors of loan delinquency.

   6. Income Smoothing in Microfinance Institutions: The Effect of Gender on the Board of Directors and the Impact of the Financial Crisis

      Liliana Marques Pimentel, Ricardo Joaquim

      Abstract

      This chapter investigates the practice of income smoothing in microfinance institutions (MFIs) and some factors that can be considered as influencing this reality, including the recognition of loan loss provisions (LLP). The analysis is conducted on a global panel data of 1833 MFIs in 112 countries for the period 2003–2019, using a two-step methodology. First, considering the coefficient proposed by Eckel (1981), data are obtained suggesting that 70.3% of the MFIs in the sample tend to smooth their results. In a second step, based on estimates from a static panel model, we obtain empirical evidence that MFIs tend to use LLP for income smoothing purposes. Contrary to expectations, the 2007 financial crisis does not significantly affect the constitution of LLP. Additionally, the results seem to suggest a significant negative impact of the financial crisis on the practice of income smoothing through LLP. On the other hand, the presence of women on the boards of directors of MFIs does not seem to inhibit the use of LLP for the purpose of smoothing results.

   7. The Influence of Women in the Board of Directors on Brazilian Credit Union Efficiency

      Cleiton Luiz Klochinski, Alessandra Cassol, Letícia Gomes Locatelli, Sandro Vieira Soares, Gabriel Bonetto Bampi, Emerson Jorge da Silva, Gabriela Zimmermann, Bernardo Molossi Comin, Fernando Maciel Ramos

      Abstract

      The literature has greatly explored the inclusion of women in managerial positions and how this affects the effectiveness of organizations, but the conclusions are still debatable. In this sense, this chapter investigates the impact of women's participation in corporate governance roles (members of the Board of Directors, members of the TMT, and as CEOs), while considering the importance of credit unions to Brazil’s economy and society. We identified a low presence of women on the executive board, fiscal council, and board of directors of credit unions based on a sample of 607 Brazilian credit unions. For the empirical analysis, we employed logistic regression estimation to investigate the impact of women's representation in management structures on the expansion of cooperatives' revenue. According to our findings, the revenue growth of credit unions with women in corporate governance roles (members of the Board of Directors, Fiscal Council, and Executive Board) is negative. Our study is particularly timely and adds to the previous literature on the effects of female leadership on the growth of credit unions. The regulatory reforms taking place in developing economies, notably Brazil, which call for the inclusion of more women in business affairs, increase the significance of our findings.

   8. Informal Microfinance in Developing Contexts and the Case of Xitique in Mozambique: A Literature Review

      Anabela Dinis, Dambusse Libombo

      Abstract

      A significant constraint for economic development in developing countries is the financial sector’s inability to support small businesses, as most are informal. However, it is possible to find alternative or informal microcredit schemes that support families and small businesses in these contexts. In several cases, they constitute an ancestral tradition. This study aims to provide an updated literature review on informal microfinance schemes and summarise the main issues and arguments on this subject. It also presents a less known case: the case of xitique, an informal and traditional Mozambican communitarian microfinance practice. Results show that traditional informal microfinance coexists with formal financial systems and exists worldwide in developing countries, often rooted in traditional and community practices that play economic and social roles. The Mozambican xitique shares common patterns with informal collective microfinance practices in other parts of the world. However, it has developed specificities in the context of informal markets. This study contributes to a deeper understanding of the theme in developing contexts and highlights the role played by informal microfinance as a part of a solidarity economyand its potential contribution to development.

4. Poverty Lending and Welfarism Approach

   1. Frontmatter

   2. The Impact of Microfinance on Individuals’ Empowerment: A Systematic Literature Review

      Salvador Fonseca, Jorge Mota, António Moreira

      Abstract

      Objective: This study aims to conduct a systematic literature review (SLR) to identify the main factors of individuals’ empowerment from the perspective of microfinance. Methodology/approach: To achieve the proposed objective, an SLR was conducted using the SCOPUS database from 1950 to 2021. From a set of 690 papers, only 43 related to empowerment factors were considered and analyzed to segment the factors and their respective sub-factors according to their nature. Findings: This SLR documents that microfinance is a tool for the economic, psychological, political, and social empowerment of people with business ideas, but without access to the traditional financial system. Also found are financial and non-financial/social factors of empowerment that must operate systematically to produce the desired effects. Practical implications: The results of this research can help microfinance institutions (MFIs) and policy makers to determine the best strategy for individuals’ economic, psychological, political and social empowerment through the microfinance lens. Originality/value: It identifies a set of empowerment factors for needy individuals with entrepreneurial ideas who, through microfinance, can find a mechanism to exit poverty.

   3. Microfinance Effects on Entrepreneurship and Poverty Alleviation: A Bibliometric Analysis

      Mara Madaleno, Elisabete Vieira

      Abstract

      This chapter intends to contribute to the analysis of microfinance effects on entrepreneurship and poverty alleviation through a bibliometric review of the existent literature, to understand the current state of microfinance research, as well as to contribute to the analysis of the influence of microfinance on entrepreneurship, financial development, economic growth, and poverty alleviation. Despite the extensive research on microfinance, no recent study has attempted to update the current state of the research regarding its influence on the other subjects in analysis. This chapter describes the evolutional research studies published in the digital library Scopus, between 2017 and 2020, and compares the results obtained over time. The research is concentrated on the bibliometric analysis in the Scopus database, considering the keyword “microfinance”, and also searching for the keywords “microfinance”, “entrepreneurship”, “financial and development”, “economic and growth”, and “poverty”. Based on the cutting-edge studies, we conclude that there is a lack of longitudinal data, heterogeneity among countries, lack of sociodemographic characteristics analysis, and little cross-country evidence, which would all be relevant issues to be explored empirically in the microfinance literature.

   4. Microfinance Interventions in the COVID-19 Challenging Context: A Systematic Review

      Mohammad Kamal Hossain, Farhana Begum, Md Tahidur Rahman, Jamaliah Said

      Abstract

      Microfinance programs are recognized as one of the world’s leading development programs, having achieved great success in alleviating poverty, reducing inequality and eliminating gender discrimination among the underprivileged population. The COVID-19 pandemic posed enormous challenges for the microfinance sector globally. Several studies have been conducted to assess the effects of the COVID-19 pandemic on the livelihoods of microcredit borrowers and the operational outcomes of microfinance institutions (MFIs). However, these studies are inadequate and provide less comprehensive evidence. Therefore, to obtain comprehensive evidence, this systematic review aimed to synthesize recent literature on the effects of the COVID-19 pandemic on microcredit borrowers’ financial and non-financial outcomes and the operations of MFIs in several nations and regions. A systematic search of four electronic databases generated 81 studies, from which 10 full-length original and reviewed articles and two working papers were selected for review by narrative analysis. These studies covered eight single countries and one cross-country of two global regions. This review documented that microfinance borrowers experienced a significant drop in their financial outcomes, such as average income, daily spending on essentials, savings, wealth accumulation and loan repayment. The pandemic also severely threatened their food security and consumption, health, education and employment opportunities. Moreover, MFIs’ regular operations, for example, credit recovery, credit demand, credit disbursement and physical counseling, were significantly disrupted.

   5. Long-Term Effect of Microfinance Services on Women’s Economic Empowerment in Yemen

      Mohammed Ali Al-Awlaqi, Ammar Mohamed Aamer, Emad Numan Alramada

      Abstract

      The study aimed to investigate the long-term effect of microfinance services on women’s economic empowerment in Yemen. Studies have investigated the short-term effect of microfinance services on women’s economic empowerment but have ignored the long-term effect. A qualitative approach was adopted using multiple case studies. The case studies used formal interviews and informal visits to collect data from women entrepreneurs as primary respondents to the study interviews. Data were collected from 18 women entrepreneurs 5 years after receiving their first loan and establishing their micro-sized businesses. Yemeni female entrepreneurs are usually denied owning their businesses, experience violence from partners and family members, are prone to business confiscation by their family members and relatives, and are denied decision-making on their own personal or business issues. The results of this research will help expose the problems faced by related stakeholders in addressing these challenges and finding solutions. This will encourage female entrepreneurs to play a critical role in contributing to the country’s economy.

   6. Natural Disaster, Livelihood Challenges and Microfinance: A Field Survey Analysis of the Sundarban Region in West Bengal, India

      Sougata Ray, Shyam Nath

      Abstract

      In this study, an economic analysis was performed to evaluate the roles of microfinance and self-help groups in adapting to and coping with the natural calamities in the Sundarban region in West Bengal. Climate change, incidence of recurrent cyclones, poverty and varying response patterns were empirically verified using primary data collected from 400 households across 21 villages of 4 administrative blocks in the Sundarban region. The survey data indicated that almost all households in the region were negatively impacted by cyclones. The econometric analysis attempted to assess the role of microfinance and self-help groups in the livelihood diversification of households, which was measured using the Simpson Index of Diversity. The results highlighted that the microfinance institutions, with the involvement of the self-help groups, have been able to help households diversify their livelihood and build resilience against natural disaster episodes. The coping behaviours were manifested in the adoption of integration farming using available local inputs and wastes after disaster and migration, among others. This represents a unique long-term model, which combines locally available resources and minimal external support, for the disaster management and rehabilitation of affected households.

5. Generalists Studies

   1. Frontmatter

   2. Discouragement and Micro Credit Rationing: Are Microfinance Institutions a Panacea?

      João Paulo Coelho Ribeiros, Fábio Duarte, Ana Paula Matias Gama

      Abstract

      The importance of micro and small businesses in economic development is well recognized. However, these firms tend to suffer from credit rationing and discouragement. In this chapter, we aim to explore the effect of microcredit as small business lending specialization on the problems of credit rationing and discouragement. We use a sample from survey on access to finance of enterprises (SAFE) containing information about micro and small firms for 38 developed and developing European countries between 2008 and 2018. We found that applying for credit on a microfinance institution (MFI) reduces the credit rationing incidence and scale, underlying the assumptions that MFIs improve the financial access to small scale loans, but with an higher cost. Our results also show that borrowers with past relationship lending with microfinance institutions are more discouraged to apply for a new loan, but a deteriorated relationships also increases financial constraints. Post estimations checks provide support for these results.

   3. The Role of Entrepreneurial Motivation and Repayment Performance on Microcredit Terms

      Serafim Nogueira, Fábio Duarte, Ana Paula Matias Gama

      Abstract

      Since its modern form, microcredit has been deemed as a viable instrument to alleviate poverty. Popularized in poor countries, its value has grown worldwide, and it is being applied in developing and developed countries. Our research investigates the role of entrepreneurial motivation and repayment performance on credit terms in the context of the Portuguese microcredit industry. Using a 2,060-microcredit loan between 1999 and 2015, our results show that the Portuguese microcredit industry tends to lend higher amounts of credit with longer maturities to entrepreneurs with a lower likelihood of repayment (entrepreneurs moved by necessity). The focus on these riskier entrepreneurs led us to confirm the argument that MC is a prosocial instrument, following its initial belief.

   4. Measuring Microcredit Delinquency Among Uruguayan Entrepreneurs: A Study of a Non-profit Microfinance Institution

      María Nela Seijas-Giménez, Milagros Vivel-Búa, Rubén Lado-Sestayo, Sara Fernández-López

      Abstract

      This paper analyses the determinants of default risk in a non-profit Uruguayan microfinance institution when a regulatory change in favor of full financial inclusion occurred in the country. Different definitions of delinquency are also used, including some that refer to a default of a structural nature. The empirical study shows that the socio-demographic characteristics of the entrepreneur (gender, age) and of microcredit (repayments, amount, year, subsidies), the historical repayment behavior (installments), and the macroeconomic environment (wages, employment, electricity, location, sector), influence the likelihood of insolvency. Overall, the results show the importance of considering this heterogeneous set of variables in assessing the probability of default and, simultaneously, monitoring them to complement the expert judgment of loan officers.

   5. Dynamics from Lending-Based Prosocial Crowdfunding in Eastern Europe: Personal Versus Business on Funding Performance

      Ana Paula Matias Gama, Ricardo Emanuel Correia, Mário Augusto, Fábio Duarte

      Abstract

      This study examines the impact of personal versus business loans and soft information on the funding performance of prosocial peer-to-peer crowdfunding in European transition economies. Using 29,432 microloans collected from Kiva (2011–2018 period) and a censored tobit regression on funding speed, we find that personal loans produce quicker funding speed. Lenders select projects perceived as having a greater impact on poverty alleviation. Business loans reveal a quasi–U-shaped relationship between soft information and funding speed, particularly for loans allocated to traditional sectors. Lenders appear to be aware that business loans are rationality-based, whereas personal loans are charitable-based decisions.

   6. Nudging as a Tool to Improve Decisions in Finance and Accounting Solutions

      Ana Maria Roux Valentini Coelho Cesar, Cecilia Moraes Santostaso Geron, Tatiana Gama Ricci

      Abstract

      During the day, thousands of decisions are made without us being aware of this effort. Cognitive shortcuts are used to make decisions. Known as heuristics, these cognitive shortcuts lead to errors resulting from these shortcuts called biases. This text presents a tools from choice architecture, named nudge, which are public or private initiatives that guide people in a direction, but do not limit their options, allowing them to follow their own path. The main decision-making theory, the choice architecture, is discussed with a focus on nudge, presenting its typology, conditions of use, and ethical discussions related to its application. Finally, the application of nudges in an organizational case is introduced. The case is in the context of microfinancing, with messages related to basic finance and motivational themes, aimed at the persistence of microentrepreneurs in their business. The results are exciting and could inspire the use of nudge in other financial contexts.

6. Backmatter