Monitoring and Loan Pricing: Do Microfinance Institutions Extract Rents from Entrepreneurs?

Abu Zafar M. Shahriar, Luisa A. Unda (), John P. Berns () and Panunya Phatraphumpakdee ()
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Abu Zafar M. Shahriar: Department of Banking and Finance, Monash University, Melbourne, Australia
Luisa A. Unda: Universitat de les Illes Balears, Palma, Spain
John P. Berns: Department of Management, University of Mississippi, Oxford, MS, USA
Panunya Phatraphumpakdee: Department of Banking and Finance, Monash University, Melbourne, Australia

Quarterly Journal of Finance (QJF), 2024, vol. 14, issue 03, 1-44

Abstract: Microfinance institutions (MFIs) have been criticized for charging high interest rates on loans. Building on multiple-principal agency theory, we argue that when an MFI acquires proprietary information about its clients through monitoring, it gains an information advantage over other lenders enabling it to extract rents by charging higher interest rates. Using data from 712 MFIs across 62 countries from 2010 to 2018, we find this to be the case. Furthermore, we find that MFIs that make more relationship-based loans, operate in less competitive markets, and those driven by for-profit commercial banking logic are more likely to extract even greater rents.

Keywords: Entrepreneurial finance; microcredit; monitoring; information advantage; interest rates (search for similar items in EconPapers)
JEL-codes: G21 G51 O16 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S2010139224500113

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