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Small Business Economics

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01.06.2013

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

verfasst von: Isabelle Agier, Ariane Szafarz

Erschienen in: Small Business Economics | Ausgabe 1/2013

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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.

Vorheriger Artikel Optimum pricing of mutual guarantees for credit

Nächster Artikel Supplier development programs and firm performance: evidence from Chile

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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.

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Titel: Subjectivity in credit allocation to micro-entrepreneurs: evidence from Brazil
verfasst von: Isabelle Agier
Ariane Szafarz
Publikationsdatum: 01.06.2013
Verlag: Springer US
Erschienen in: Small Business Economics / Ausgabe 1/2013
Print ISSN: 0921-898X
Elektronische ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-012-9429-9

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