Essays in microfinance

Abu Zafar Md Shahriar, Purdue University

Abstract

This dissertation includes three essays in microfinance. Using primary data from Bangladesh, the first essay examines the role of bank-borrower relationships in the application and approval of microcredit. The empirical findings suggest that the likelihood of applying, and being approved, for microcredit increases as the length of membership with a microfinance institution (MFI) increases. Those who have taken loans from the same MFI before are more likely to apply for new loans; and those who have maintained a non-mandatory savings account are more likely to apply and be approved for microcredit. Having relationships with multiple lenders reduces the probability of being approved for a loan. Furthermore, it is the large (rather than small) MFIs that rely more on relationship metrics. The findings complement the intuition provided in the theoretical in that, in addition to joint liability, MFIs substantially rely on relationship driven information in extending loans. The second essay examines whether the likelihood of forming heterogeneous borrowing groups increases in microcredit when borrowers are able to transfer resources among themselves for purposes of risk sharing. Based on evidence from framed field experiments in Bangladesh, the study shows that risky borrowers are willing to offer side payments, as insurance premium, which can attract safe borrowers to form heterogeneous borrowing groups. However, existence of a strong social tie among the potential borrowing partners is necessary for the emergence of heterogeneous groups in microcredit. The third easy uses primary data from Bangladesh to examine whether bank-borrower relationships affect the process of transition from joint liability to individual liability loans in microcredit. Using instrumental variables in survival analysis, it shows that borrowers, who maintain a non-mandatory savings account with the MFI, and those who borrow from a single MFI, graduate from joint to individual liability loans with relatively short repayment records. The results are robust across a range of non-parametric and parametric specifications. The findings imply that MFIs have incentives to invest in relationship development in order to expedite the process of transition from joint to individual liability loans, which in turn, can reduce the incidence of voluntary drop outs by the matured borrowers.

Degree

Ph.D.

Advisors

Chakravarty, Purdue University.

Subject Area

Economics|Finance|Banking

COinS