Financial inclusion through specialization or diversification with group and individual loans in microfinance

Valentina Hartarska (), Jingfang Zhang () and Denis Nadolnyak ()
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Valentina Hartarska: Auburn University
Jingfang Zhang: Alcorn State University
Denis Nadolnyak: Auburn University

Empirical Economics, 2025, vol. 68, issue 6, No 9, 2767-2798

Abstract: Abstract The poorest clients of microfinance institutions (MFIs) use more group loans than individual loans, yet fewer group loans are available, possibly because of their higher cost. We evaluate whether MFIs that offer both group and individual loans benefited from this diversification relative to specializing in only one loan type. We estimate separate economies of diversification and their changes over time for credit-only and credit-plus-deposit MFIs with panel data from 101 countries for the period 2008 to 2018. To accommodate the small number of MFIs specializing in group loans, we apply an estimation method that resolves the “excessive extrapolation” challenge. The results indicate that over a quarter of credit-only MFIs have on average 10% lower costs from diversification, while the majority of credit-plus-deposit MFIs are better off specializing. Since policymakers tend to support the credit-plus-deposit for-profit business model, awareness of the cost implications is essential as it may limit the financial inclusion of the poorest users of group loans.

Keywords: Outreach; Economies of diversification; Microfinance; Group loans; Individual loans; Excessive extrapolation (search for similar items in EconPapers)
JEL-codes: G15 G21 Q14 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-025-02714-3

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