Information, the Cost of Credit, and Operational Efficiency: An Empirical Study of Microfinance

Mark J. Garmaise and Gabriel Natividad ()

The Review of Financial Studies, 2010, vol. 23, issue 6, 2560-2590

Abstract: We provide direct evidence on the impact of asymmetric information on both financing and operating activities through a study of credit evaluations of microfinance institutions (MFIs). We employ a regression discontinuity model that exploits the eligibility criteria of an evaluation subsidy offered by a nonprofit consortium. Evaluations dramatically cut the cost of financing. This effect is strongest for commercial lenders and for short-term MFI--lender relationships. The impact of evaluations on the supply of finance is mixed. Evaluated MFIs lend more efficiently, extending more loans per employee. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2010
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