Is there an optimal microcredit size to maximize the social and financial efficiencies of microfinance institutions?

A.J. Blanco-Oliver, A.I. Irimia-Diéguez and M.J. Vázquez-Cueto

Research in International Business and Finance, 2023, vol. 65, issue C

Abstract: Financial intermediation theory posits that a smaller loan size triggers a higher cost per dollar lent. This leads to question whether microfinance can become a self-sustainable industry. Hence, in microfinance innovations like loans without collateral, progressive loans, solidarity groups and relational lending are employed to reduce asymmetric information costs, adverse selection, and moral hazard while serving the poorest people. Crucially, we find a non-linear U-shaped effect of loan size on financial and social efficiencies. This reconciles the two opposite strands of the literature, aligning microfinance and banking central principles. The major implication of this study is that, unlike banking, microfinance institutions can grant small size loans while simultaneously obtaining high levels of financial and social efficiency. Indeed, our findings do not support the widely debated mission drift assumption since loan size does not generate a trade-off between financial and social outcomes. Therefore, loan size is a core management variable.

Keywords: Microfinance; Loan size; Efficiency; Mission drift; Financial sustainability; Social impact (search for similar items in EconPapers)
JEL-codes: C14 G21 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:65:y:2023:i:c:s027553192300106x

DOI: 10.1016/j.ribaf.2023.101980

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