Does Regulatory Supervision Curtail Microfinance Profitability and Outreach

By Robert J. Cull, Asli Demirgüç-Kunt, J. Morduch. 2009

390 citations recorded by the source corpus.

Regulation allows microfinance institutions to evolve more fully into banks, particularly for institutions aiming to take deposits. But there are potential trade-offs. Complying with regulation and supervision can be costly. The authors examine the implications for the institutions profitability and their outreach to small-scale borrowers and women. The tests draw on a new database that combines high-quality financial data on 245 of the worlds largest microfinance institutions with newly-constructed data on their prudential supervision. Ordinary least squares regressions show that supervision is negatively associated with profitability. Controlling for the non-random assignment of supervision via treatment effects and instrumental variables regressions, the analysis finds that supervision is associated with substantially larger average loan sizes and less lending to women than in ordinary least squares regressions, although it is not significantly associated with profitability. The pattern is consistent with the notion that profit-oriented microfinance institutions absorb the cost of supervision by curtailing outreach to market segments that tend to be more costly per dollar lent. By contrast, microfinance institutions that rely on non-commercial sources of funding (for example, donations), and thus are less profit-oriented, do not adjust loan sizes or lend less to women when supervised, but their profitability is significantly reduced.

Subfields: Accounting, Economics and Econometrics, Management Information Systems

View Paper: https://www.semanticscholar.org/paper/44a316b7bf96784d5a65e61ee607f08f328966a5

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Citations in the corpus

The institutional context of poverty: State fragility as a predictor of cross‐national variation in commercial microfinance lending (2014, background): “…commercial microfinance model must show that it can consistently earn high profits over the long run if it wishes to attract investors that view it more as an asset class than a social program for helping the poor (Cull, Demirgüç-Kunt, and Morduch, 2009; Gonzalez, 2007; Krauss and Walter, 2009).”
Islamic Banking Sustainability: A Review of Literature and Directions for Future Research (2016, background): “In this view, Cull, Demirgüç-Kunt, and Morduch (2011) admitted that despite the cost involved in regulatory compliance, it also expands intermediary functions of the banks.”
Microfinance and economic development (2017, background): “For example, empirical evidence from crosscountry data suggests that commercially oriented microfinance institutions bear the costs of active prudential supervision by making larger loans and lending less to women, both signs of curtailed outreach (Cull et al. 2011).”
The Profit Orientation of Microfinance Institutions and Effective Interest Rates (2013, result): “Rather, as Cull et al. (2009) suggest, “earning profits does not imply being a ‘for‐profit’ bank.””
Audit Quality and Corporate Governance: Evidence from the Microfinance Industry (2012, neutral): “Relevant regulations for MFIs can include rules that govern MFI formation and operations, consumer protection, fraud prevention, the establishment of credit information services, secured transactions, interest rate limits, the ability to mobilize deposits, minimum levels of provisions for future los”