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18-02-2021 | Original Research

Religiosity, borrower gender and loan losses in microfinance institutions: a global evidence

Authors: Ernest Gyapong, Daniel Gyimah, Ammad Ahmed

Published in: Review of Quantitative Finance and Accounting | Issue 2/2021

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Abstract

We examine the impact of religious beliefs on loan repayments in 770 microfinance institutions (MFIs) across 65 countries over the period 2006–2018. We find robust evidence of a negative relationship between religiosity and loan losses in MFIs. We also find that the relationship between religiosity and loan losses is stronger for MFIs in Protestant-dominated countries than in Catholic-dominated countries. Moreover, religiosity improves the operational self-sufficiency of MFIs through a reduction in loan losses. We find that religiosity does not improve the loan repayment behaviour of women borrowers, but it reduces the loan size per borrower. Overall, our evidence suggests that although religiosity reduces loan losses through religiosity-induced lender-risk aversion, it does not improve the loan repayment behaviour of borrowers. We also use several approaches to evaluate our results to the effects of endogeneity.

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MFIs operate in an environment where collateral is scarce. Consequently, MFIs mostly resort to group lending with joint liability to create social collateral, which replaces physical collateral (Simtowe et al. 2006). However, prior studies have suggested that unlike collateralised loan contracts, joint liability loan contracts lead to loan defaults due to moral hazard, collusion and free-riding (Simtowe et al. 2006). Nevertheless, MFIs that take customer deposits have the luxury of using these deposits as collateral to either discourage customers from loan defaults or confiscate these deposits if customers default.

This was based on the results of the Hausman test (Hausman 1978), which rejects the null hypothesis that individual effects are uncorrelated.

The previous US studies conducted by Hilary and Hui (2009), He and Hu (2016) and Adhikari and Agrawal (2016a, b) reported standard deviations of 0.119, 0.124 and 0.129, respectively.

In unreported regressions, we replaced OSS with the return on assets (ROA). The results remained qualitatively similar.

Following Adhikari and Agrawal (2016a), we also adopted 2007–2008 as the financial crisis years. The untabulated results remained qualitatively similar.

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Title: Religiosity, borrower gender and loan losses in microfinance institutions: a global evidence
Authors: Ernest Gyapong
Daniel Gyimah
Ammad Ahmed
Publication date: 18-02-2021
Publisher: Springer US
Published in: Review of Quantitative Finance and Accounting / Issue 2/2021
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-021-00958-5

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