UMM Award Winners 2009
1st UMM Award 2009: Mission Drift in Microfinance
Pim Engels student of economics at Tilburg University, received the 1st Prize of the University Meets Microfinance - Awards for his Master thesis on the influence of institutional and country risk indicators on the trade-off between the financial and social performance of microfinance institutions (MFIs). He has carried out his research with ING Microfinance and could analyze data of 600 microfinance institutions operating in 84 countries in 2007. Please find below a brief summary of his research:
The interest of institutional investors in the dual return investment opportunity of microfinance is growing. At the same time, however, the microfinance industry is facing growing pains. Rapidly commercialising MFIs show signs of mission drift. Reaching out to wealthier clients, while crowding out poorer clients, enhances profitability. Tension between the financial sustainability and social performance advocates is rising, whilelittle empirical evidence on this topic is available so far. The purpose of Engels’ research was to see how institutional investors can recognize and prevent mission drift taking place amongst the MFIs in their own portfolio
First, the author concentrates on the role of institutional and country risk indicators in predicting the financial and social performance of MFIs. Evidence shows for instance that regulation, network membership and institution’s size do not affect the financial performance of MFIs. Country risk rating is negatively associated with the financial performance of MFIs. Alternatively, regulation, size and country risk rating negatively affect the social performance of MFIs. Network membership positively affects the social performance of MFIs.
Then, the author explores the relationship between the financial and social performance of MFIs.Strong evidence for the existence of a trade-off between the financial and social performance of MFIs is found. Nevertheless, by balancing the profitability, cost efficiency, and productivity of the institution, MFIs can prevent the occurrence of mission drift.
Lastly, Engels analyses how variations of the institutional and country risk indicators influence the trade-off found. Evidence suggests that regulation and size of institutions make MFIs more susceptible, while network membership make MFIs less susceptible to the occurrence of mission drift. Young MFIs are more susceptible to mission drift, while more mature MFIs are more susceptible to reverse mission drift.
Based on these findings Engels states, that investors can prioritise institutional and country risk rating indicators in order to assess the balance between the financial and social performance of MFIs.
The thesis was supervised by Professor Thorsten Beck and supported by ING Micro Finance.
You can order his publication here.
The thesis is available for download. Please click here.
2nd UMM Award 2009: The Performance of Microcredit Organisations: A Comparative Perspective
Self-Help Group (SHG) microcredit is emerging as a springboard of developmental finance for Income Generating Activities (IGAs) in rural areas of India, serving the cause of the landless, small, and marginal households. SHG peer pressure is the primary driver of impressive repayment performance. The results of Saikumar C. Bharamappanavara‘s research study on India reveal that homogeneity of SHG members and freedom of participation in SHG deliberations are primarily responsible for strengthening collective action. Specifically, savings and loan per capita, satisfactory performance of organisation, awareness of SHG linkage, family size, and age-induced responsibility were found to strongly influence the economic performance of SHGs. These are the key drivers of the welfare and sustainability of SHGs.
Using empirical evidence, Saikumar C. Bharamappanavara demonstrates the emergence of prime factors determining the performance of SHGs in India by examining their organisational behaviour and recommends appropriate policies for social cloning.
You can order his publication here.
3rd UMM Award 2009: Microfinance 2.0 - Group Formation & Repayment Performance in Online Lending Platforms During the U.S. Credit Crunch
Thilo Klein, currently studying at Cambridge University, received a “University Meets Microfinance” Award for his Master thesis on online lending platforms written at the University of Jena, Germany, in 2009. The thesis “Microfinance 2.0 – Group Formation and Repayment Performance in Online Lending Platforms” examines the role of reputation based intermediaries on the world’s largest peer-to-peer online lending platform. This marketplace as well as other recently opened lending websites allow people to auction micro-credit over the internet and are in line with the disintermediation in financial transactions. In the online market, the screening of potential borrowers and the monitoring of loan repayment can be delegated to designated group leaders. The study found that, despite superior private information, these financial intermediaries perform worse than the average lender with respect to borrower selection. Statistics attribute ineffective results of borrower selection to the fact of deliberately sending wrong signals. The results of bivariate probit model estimates of the effect of group membership on loan default indicate positive self selection into group loans. This means that borrowers with worse observed and unobserved characteristics select into group contracts.
The study provides evidence that this is due to a misleading group reputation system that is driven by a short term incentive design, which was introduced by the platform to expand the market and has been discontinued in September 2007. Furthermore, after controlling for the platform’s incentive design, responsible for driving the group growth and the ineffective selection effect, group affiliation per se, significantly reduces the probability of loan default. The thesis reveals mixed evidence of the potential of online lending platforms to transfer the group lending model from developing countries to online communities in the competitive U.S. retail banking market. Additional research is needed to understand the mechanism of online credit information networks and their potential to ease access to entrepreneurial finance for the credit constrained in industrialized countries.
The thesis was supervised by Dr. Jagannadha Pawan Tamvada, Max Planck Institute of Economics, Jena, Germany.
You can order his publication here.
The thesis is available for download. Please click here.
