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Income Smoothing, Capital Management and Provisioning Behaviour of Microfinance Institutions: A Study Using Global Panel Data

Ashim Kar ()

The European Journal of Development Research, 2017, vol. 29, issue 1, 108-126

Abstract: Abstract This article investigates the effects of earnings and capital positions on loan-loss provisioning behaviour of microfinance institutions (MFIs) and whether such provisioning is pro-cyclical. The analysis is based on a global panel database of 1294 MFIs in 103 countries over the period of 1996–2013. Results of static and dynamic model estimations confirm the validity of the income-smoothing hypothesis as earnings positively and significantly affect MFIs’ provisioning behaviour. This indicates increased provisioning during times of making profits than in times of incurring loss. As expected, the study also finds that the impact of business cycle on provisioning is pro-cyclical with some regional variations. However, the study fails to confirm that MFIs’ capital management situation significantly impacts their loan-loss provisioning.

Keywords: microfinance institutions; loan-loss provisioning; income smoothing; pro-cyclicality; dynamic panel data estimation (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:pal:eurjdr:v:29:y:2017:i:1:d:10.1057_ejdr.2015.81