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

Sara Biancini, David Ettinger and Baptiste Venet

No 8893, CESifo Working Paper Series from CESifo

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.

Keywords: microfinance; mission drift; moral hazard (search for similar items in EconPapers)
JEL-codes: G21 O12 O16 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mfd
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8893

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