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When Pro-Poor Microcredit Institutions Favor Richer Borrowers - A Moral Hazard Story

Author

Listed:
  • Sara Biancini
  • David Ettinger
  • Baptiste Venet
Abstract
We suggest an explanation for the existence of “mission drift”, the tendency for Microfinance Institutions (MFIs) to lend money to wealthier borrowers rather than to the very poor. We focus on the relationship between MFIs and external funding institutions. We assume that both the MFIs and the funding institutions are pro-poor and agree on the optimal proportion of funds to be granted to the poorer borrower. However, asymmetric information on the effort chosen by the MFI to identify higher quality projects may increase the share of loans attributed to wealthier borrowers. This occurs because funding institutions have to build incentives for MFIs, creating a trade off between the quality of the funded projects and the attribution of loans to poorer borrowers.

Suggested Citation

  • Sara Biancini & David Ettinger & Baptiste Venet, 2021. "When Pro-Poor Microcredit Institutions Favor Richer Borrowers - A Moral Hazard Story," CESifo Working Paper Series 8893, CESifo.
    • Handle: RePEc:ces:ceswps:_8893
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    References listed on IDEAS

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    More about this item

    Keywords

    microfinance; mission drift; moral hazard;
    All these keywords.

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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