Top

Small Business Economics

Published in:

01-06-2013

Subjectivity in credit allocation to micro-entrepreneurs: evidence from Brazil

Authors: Isabelle Agier, Ariane Szafarz

Published in: Small Business Economics | Issue 1/2013

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

This paper estimates the impact of loan officer subjectivity on microcredit granting by exploiting an exceptionally detailed database from a Brazilian microfinance institution. The loan officers collect field data, meet with applicants, and make recommendations to the credit committee, which has the final say on both loan approval and loan size (LS). The loan officer’s subjectivity is captured through gender bias. Our estimations indeed show subjective gender gap in LS. This gap is almost exclusively attributable to loan officers. We interpret this finding as evidence that, despite monitoring and wage incentivization, microcredit officers let their subjective preferences interfere with loan granting. We conclude by suggesting alternative means to curb subjectivity in credit allocation to micro-entrepreneurs.

previous article Optimum pricing of mutual guarantees for credit

next article Supplier development programs and firm performance: evidence from Chile

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

See Tra and Lensink (2007) for a comparative discussion on the lending practices of formal and informal credit markets.

Moreover, Hartarska (2005) shows that, in Central and Eastern Europe, performance-based compensation is not necessarily associated with better-performing microfinance institutions (MFIs).

The MFIs best interests need not be restricted to profit maximization. For instance, Conning (1999), McIntosh and Wydick (2005), Ghosh and Van Tassel (2008), and Armendáriz and Szafarz (2011) propose models built on socially-oriented objective functions.

This interest rate has to be understood in the Brazilian context. Over the period 1997–2007, the central bank key interest rate (celic) was between 0.89 and 2.58 % a month (i.e. between 11.18 and 35.76 % a year). During the same period, Fininvest, a for-profit institution, was offering consumption loans with rates reaching 12 % a month. Until 2009, VivaCred was funded by BNDES (Brazilian Bank of Development) at an annual rate of 7.5 % (this rate was even higher during the period 1997–2007). Later, VivaCred integrated the national program CrediAmigo financed by Banco do Nordeste, a Brazilian public bank.

The contracts with incomplete specifications, the loans to VivaCred’s employees, and the few group loans were removed.

VivaCred considers loans as delayed after 30 days, and defaulted after 180 days.

Actually, the so-called “credit committee” refers to a single person who is either the branch manager or a senior credit officer, depending on the requested amount (RA).

In a different context, Bates and Bradford (2009) show that minority-oriented venture capital funds tend to drift away from their mission of investing in minority firms.

In the first-best situation, the MFI should correct this original bias, and therefore apply milder credit rationing to female applicants.

Bold characters are used for vectors.

From Table 3 and Eqs. (5), (10), and (8), we derive the following estimates: \(\hat{b}_{\rm F}=-28.76,\) \(\hat{c}_{\rm R}= 0.0165, \) and \(\hat{c}_{\rm F} =-6.99. \) These figures lead to the estimated products: \(\widehat{c_{\rm P}b_{\rm F}}=-25.57,\,\widehat{c_{\rm P}b_{\rm R}a_{\rm F}}=-59.66, \) and \(\widehat{c_{\rm R}a_{\rm F}}=-1.77.\)

Known clients have already reimbursed one loan at least.

Notably, the officer’s gender does not explain the gender gap in PAs.

As stated by Microsave (http://www.microsave.org/toolkit/individual-lending-for-credit-officers-toolkit): “At most institutions, Credit Officers must be everything and do everything. They must take a client through the lending process, from the first introduction to the MFI and products to full repayment of the loan. In some institutions, they underwrite several different types of loans, as well as sell many different types of bank products. The Credit Officer is expected to be in the field 80 % of the time and cover as many potential borrowers as possible.”

According to McKim and Hughart (2005), the share of MFIs that use staff incentive schemes grew from 6 % in 1990 to 63 % in 2003. De Janvry et al. (2010) and Labie et al. (2010) discuss the merits of incentive-based wage schemes for non-profit MFIs.

For instance, D’Espallier et al. (2011) find that female credit officers increase the odds of serving women. However, Wilson et al. (2007) and Agier and Szafarz (2010) show that female credit officers do not mitigate the gender bias in credit allocation.

Agier, I., & Szafarz, A. (2010). Microfinance and gender: Is there a glass ceiling in loan size? Université Libre de Bruxelles CEB Working Papers 10-047.

Alesina, A. F., Lotti, F., & Mistrulli, P. E. (2008). Do women pay more for credit? Evidence from Italy. National Bureau of Economic Research Working Paper Series 14202.

Armendáriz, B., & Morduch, J. (2010). The economics of microfinance (2nd ed.). Cambridge, MA: The MIT Press.

Armendáriz, B., & Szafarz, A. (2011). On mission drift in microfinance institutions. In B. Armendariz, & M. Labie (Eds.), The handbook of microfinance (pp. 341–366). London: World Scientific Publishing.CrossRef

Aubert, C., de Janvry, A., & Sadoulet, E. (2009). Designing credit agent incentives to prevent mission drift in pro-poor microfinance institutions. Journal of Development Economics, 90(1), 153–162.CrossRef

Bates, T., & Bradford, W. (2009). The impact of institutional sources of capital upon the minority-oriented venture capital industry. Small Business Economics, 33(4), 485–496.CrossRef

Bellucci, A., Borisov, A., & Zazzaro, A. (2010). Does gender matter in bank–firm relationships? Evidence from small business lending. Journal of Banking & Finance, 34(12), 2968–2984.CrossRef

Berger, A. N., & Udell, G. F. (1995). Relationship lending and lines of credit in small firm finance. Journal of Business, 68(3), 351–381.CrossRef

Blanchflower, D. G., Levine, P. B., & Zimmerman, D. J. (2003). Discrimination in the small-business credit market. Review of Economics and Statistics, 85(4), 930–943.CrossRef

Boot, A. W. A. (2000). Relationship banking: What do we know? Journal of Financial Intermediation, 9(1), 7–25.CrossRef

Brana, S. (2011). Microcredit: An answer to the gender problem in funding? Small Business Economics. doi:10.1007/s11187-011-9346-3.

Buvinic, M., & Berger, M. (1990). Sex differences in access to a small enterprise development fund in Peru. World Development, 18(5), 695–705.CrossRef

Cavalluzzo, K., & Cavalluzzo, L. (1998). Market structure and discrimination: The case of small businesses. Journal of Money, Credit and Banking, 30(4), 771–792.CrossRef

Cavalluzzo, K., & Wolken, J. (2005). Small business loan turndowns, personal wealth, and discrimination. Journal of Business, 78(6), 2153–2178.CrossRef

Churchill, C. F. (1999). Client focused lending—the art of individual lending. Toronto, ON: Calmeadow.

Coleman, S., & Robb, A. (2009). A comparison of new firm financing by gender: Evidence from the Kauffman firm survey data. Small Business Economics, 33(4), 397–411.CrossRef

Conning, J. (1999). Outreach, sustainability and leverage in monitored and peer-monitored lending. Journal of Development Economics, 60(1), 51–77.CrossRef

de Janvry, A., McIntosh, C., & Sadoulet, E. (2010). The supply- and demand-side impacts of credit market information. Journal of Development Economics, 93(2), 173–188.CrossRef

DeMartino, R., & Barbato, R. (2003). Differences between women and men MBA entrepreneurs: Exploring family flexibility and wealth creation as career motivators. Journal of Business Venturing, 18(6), 815–832.CrossRef

D’Espallier, B., Guérin, I., & Mersland, R. (2011). Women and repayment in microfinance: A global analysis. World Development, 39(5), 758–772.CrossRef

Diagne, A., Zeller, M., & Sharma, M. (2000). Empirical measurements of households’ access to credit and credit constraints in developing countries: Methodological issues and evidence. IFPRI Food Consumption and Nutrition Division Discussion Paper 90, Washington, DC.

Dixon, R., Ritchie, J., & Siwale, J. (2007). Loan officers and loan ‘delinquency’ in microfinance: A Zambian case. Accounting Forum, 31(1), 47–71.CrossRef

Egli, D. (2004). Progressive lending as an enforcement mechanism in microfinance programs. Review of Development Economics, 8(4), 505–520.CrossRef

Fay, M., & Williams, L. (1993). Gender bias and the availability of business loans. Journal of Business Venturing, 8(4), 363–376.CrossRef

Fuentes, G. A. (1996). The use of village agents in rural credit delivery. Journal of Development Studies, 33(2), 188.CrossRef

Ghosh, S., & Van Tassel, E. (2008). A model of mission drift in microfinance institutions. Department of Economics, College of Business, Florida Atlantic University Working Papers 08003, Boca Raton, FL.

Hand, D. J., & Henley, W. E. (2007). Statistical classification methods in consumer credit scoring: A review. Journal of the Royal Statistical Society, Series A, 160(3), 523–541.

Hartarska, V. (2005). Governance and performance of microfinance institutions in Central and Eastern Europe and the newly independent states. World Development, 33(10), 1627–1643.CrossRef

Holland-Noronha, N. (2010). Economic and sociocultural experiences of female entrepreneurs in Brazil and the United States: An exploratorial and empirical analysis. PhD Dissertation, Robert Gordon University, Aberdeen.

Karlan, D., & Zinman, J. (2009). Observing unobservables: Identifying information asymmetries with a consumer credit field experiment. Econometrica, 77(6), 1993–2008.CrossRef

Labie, M. (2001). Corporate governance in microfinance organizations: A long and winding road. Management Decision, 39(4), 296–302.CrossRef

Labie, M., Méon, P.-G., Mersland, R., & Szafarz, A. (2010). Discrimination by microcredit officers: Theory and evidence on disability in Uganda. Université Libre de Bruxelles CEB Working Papers 10-007.

Lewis, E. M. (1994). Introduction to credit scoring. San Rafael, CA: Athena Press.

McIntosh, C., & Wydick, B. (2005). Competition and microfinance. Journal of Development Economics, 78(2), 271–298.CrossRef

McKim, A., & Hughart, M. (2005). Staff incentive schemes in practice: Finding of a global survey of microfinance institutions. MicroFinance Network, CGAP.

Méon, P.-G., & Szafarz, A. (2011). The modern corporation as a safe haven for taste-based discrimination: An agency model of hiring decisions. Labour Economics, 18(4), 487–497.CrossRef

Mersland, R., & Øystein Strøm, R. (2010). Microfinance mission drift? World Development, 38(1), 28–36.CrossRef

Mueller, S. L., & Dato-On, M. C. (2011). A cross cultural study of gender-role orientation and entrepreneurial self-efficacy. International Entrepreneurship and Management Journal. doi:10.1007/s11365-011-0187-y.

Pelegrino, A. I. C. (2006). Trabalho informal: a questão das mulheres das favelas de Praia da Rosa e Sapucaia. In Cidade, Transformaçõesno mundo do trabalho e políticas públicas. A questão do comércio ambulante em tempos de globalização (pp. 31–49). Rio de Janeiro, Maria de Fatima Cabral Marques Gomes (Ed): DP&A editora.

Riding, A. L., & Swift, C. S. (1990). Women business owners and terms of credit: Some empirical findings of the Canadian experience. Journal of Business Venturing, 5(5), 327–340.CrossRef

Ross, S. L., & Yinger, J. (2002). The color of credit: Mortgage discrimination, research methodology, and fair-lending enforcement. Cambridge, MA: MIT Press.

Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. American Economic Review, 71(3), 393–410.

Storey, D. (2004). Racial and gender discrimination in the micro firms credit market?: Evidence from Trinidad and Tobago. Small Business Economics, 23(5), 401–422.CrossRef

Tra, P. T. T., & Lensink, R. (2007). Lending policies of informal, formal and semiformal lenders. Economics of Transition, 15(2), 181–209.CrossRef

Warning, M., & Sadoulet, E. (1998). The performance of village intermediaries in rural credit delivery under changing penalty regimes: Evidence from Senegal. Journal of Development Studies, 35(1), 115.CrossRef

Wilson, F., Carter, S., Tagg, S., Shaw, E., & Lam, W. (2007). Bank loan officers’ perceptions of business owners: The role of gender. British Journal of Management, 18(2), 154–171.CrossRef

Title: Subjectivity in credit allocation to micro-entrepreneurs: evidence from Brazil
Authors: Isabelle Agier
Ariane Szafarz
Publication date: 01-06-2013
Publisher: Springer US
Published in: Small Business Economics / Issue 1/2013
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-012-9429-9

Springer Professional

Abstract

Please log in to get access to your license.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Other articles of this Issue 1/2013

When is Gibrat’s law a law?

Balanced skills among nascent entrepreneurs

Black–White gap in self-employment. Does intra-race heterogeneity exist?

Intrapreneurial intentions versus entrepreneurial intentions: distinct constructs with different antecedents

The dynamics of exports and R&D in SMEs

Ethics-focused dynamic capabilities: a small business perspective

Premium Partner