ON THE PROVISION OF MICRO LOANS - MICROFINANCE INSTITUTIONS AND TRADITIONAL BANKS

Rubana Mahjabeen ()
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Rubana Mahjabeen: Department of Economics, Truman State University

Journal of Economic Development, 2010, vol. 35, issue 1, 59-73

Abstract: This paper employs a utility maximizing model to answer two questions: (i) what are the cost-related factors that determine the supply of a loan by traditional banks and microfinance institutions (MFIs)?; and (ii) why is the supply of micro loan zero under a bank¡¯s maximization problem while it is positive under the maximization problem of an MFI? We find that costs associated with default, information asymmetry and liability determine the supply of a loan by a financial institution. Furthermore, we show that under certain conditions (that we derive) a bank may make a loss if it provides micro loan. As a result, it does not supply micro loan.

Keywords: Bank; Group Lending; Microfinance Institutions; Joint Liability; Micro Loans (search for similar items in EconPapers)
JEL-codes: D24 G21 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:jed:journl:v:35:y:2010:i:1:p:59-73

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