Risk transfer versus cost reduction on two-sided microfinance platforms

Bryan Bollinger () and Song Yao ()
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Bryan Bollinger: Duke University
Song Yao: University of Minnesota

Quantitative Marketing and Economics (QME), 2018, vol. 16, issue 3, No 1, 287 pages

Abstract: Abstract Microfinance can be an important tool for fighting global poverty by increasing access to loans and possibly lowering interest rates through microlending. However, the dominant mechanism used by online microfinance platforms, in which intermediaries administer loans, has profound implications for borrowers. Using an analytical model of microlending with intermediaries who disburse and service loans, we demonstrate that profit-maximizing intermediaries have an incentive to increase interest rates because much of the default risk is transferred to lenders. Borrower and lender interest rate elasticities can serve as disciplining mechanisms to mitigate this interest rate increase. Using data from Kiva.org, we find that interest rates do not affect lender decisions, which removes one of these disciplining mechanisms. Interest rates are high, around 38% on Kiva. In contrast, on an alternative microfinance platform that does not use intermediaries, Zidisha, interest rates are only around 10%, highlighting the dramatic impact of intermediaries on interest rates. We propose an alternative loan payback mechanism that still allows microfinance platforms to use intermediaries, while removing the incentive to increase interest rates due to the transfer of risk to lenders.

Keywords: Microfinance; Crowdfunding; Two-sided platforms; FinTech; Lending; Pricing; Risk transfer (search for similar items in EconPapers)
JEL-codes: D21 D22 D47 D53 L11 L2 L3 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11129-018-9198-0

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