Incentives, Supervision and Regulation of Microfinance Institutions in the developing countries

Mathurin Founanou and Zaka Ratsimalahelo

MPRA Paper from University Library of Munich, Germany

Abstract: We analyze the optimal regulation of a MFI that has private information on the intrinsic quality of its loan portfolio (adverse selection) and where the MFI’s choice of effort to improve this quality cannot be observed by the regulator (moral hazard). In designing optimal contracts the regulator faces a tradeoff between inducing proper incentives for efficient MFI and costs of regulation in terms of leaving an informational rent for a high quality MFI. We identify conditions for the optimal incentive contract and show that, not surprisingly, these contracts depend on the accuracy of the supervisor’s signal, the likelihood of facing a high quality MFI, and the cost of supervision. However, since improving the accuracy of supervision is costly, even in the optimal monitoring scheme there generally exists a positive probability of MFI failure. The content of information disclosure is characterized by the optimal monitoring scheme.

Keywords: Microfinance institution; adverse selection; moral hazard; regulation; supervision; optimal incentive contracts (search for similar items in EconPapers)
JEL-codes: D82 G21 G28 (search for similar items in EconPapers)
Date: 2012-09
New Economics Papers: this item is included in nep-mfd
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