Social Indicators Research

, Volume 133, Issue 2, pp 455–475 | Cite as

The Poverty Penalty and Microcredit

  • Begoña Gutiérrez-Nieto
  • Carlos Serrano-Cinca
  • Beatriz Cuéllar-Fernández
  • Yolanda Fuertes-Callén
Article

Abstract

A poverty penalty arises when the poor pay more than the non-poor to access goods and services. An example is the cost to access credit. Microfinance Institutions (MFIs) usually explain their high interest rates on the grounds of the high risk involved in microcredit, the high fixed cost associated with small loans and the high financial expenses borne by MFIs due to difficulties in deposit collection. The paper finds that a poverty penalty exists. After identifying drivers of the poverty penalty in a sample of MFIs from 17 countries, this paper focuses on the Colombian case. Operating costs is the most important factor explaining effective interest rates. Other factors, such as risk, cost of funds, or profitability, are relevant in some regions. This paper encourages transparent pricing as a keystone for ethics in these entities.

Keywords

Microfinance Poverty penalty Mission drift Banking 

References

  1. Adams, D., Graham, D., & Von Pischke, J. (1984). Undermining rural development with cheap credit. Boulder: Westview Press.Google Scholar
  2. Ahlin, C., Lin, J., & Maio, M. (2011). Where does microfinance flourish? Microfinance institution performance in macroeconomic context. Journal of Development Economics, 95(2), 105–120.CrossRefGoogle Scholar
  3. Aleem, I. (1990). Imperfect information, screening, and the costs of informal lending: A study of a rural credit market in Pakistan. World Bank Economic Review, 4(3), 329–349.CrossRefGoogle Scholar
  4. Augsburg, B., & Fouillet, C. (2010). Profit empowerment: The microfinance institution’s mission drift. Perspectives on Global Development and Technology, 9(3–4), 327–355.Google Scholar
  5. Basharat, B., Hudon, M., & Nawaz, A. (2015). Does efficiency lead to lower prices? A new perspective from microfinance interest rates. Strategic Change, 24(1), 49–66.CrossRefGoogle Scholar
  6. Bertrand, M., & Morse, A. (2011). Information disclosure, cognitive biases, and payday borrowing. The Journal of Finance, 66(6), 1865–1893.CrossRefGoogle Scholar
  7. Bhaduri, A. (1977). On the formation of usurious interest rates in backward agriculture. Cambridge Journal of Economics, 1, 341–352.Google Scholar
  8. Bogan, V. L. (2012). Capital structure and sustainability: An empirical study of microfinance institutions. Review of Economics and Statistics, 94(4), 1045–1058.CrossRefGoogle Scholar
  9. Caplovitz, D. (1963). The poor pay more: Consumer practices of low income families. Toronto, Ontario: Free Press of Glencoe.Google Scholar
  10. Carbó, S., Gardener, E. P., & Molyneux, P. (2005). Financial exclusion. Basingstoke, UK: Palgrave MacMillan.CrossRefGoogle Scholar
  11. Committee, Basel. (2013). Consultative document revised basel III leverage ratio framework and disclosure requirements. Basel, Switzerland: Basel Committee on Banking Supervision.Google Scholar
  12. Cull, R., Demirguç-Kunt, A., & Morduch, J. (2007). Financial performance and outreach: A global analysis of leading microbanks. Economic Journal, Royal Economic Society, 117(517), F107–F133.Google Scholar
  13. D’Espallier, B., Hudon, M., & Szafarz, A. (2013). Unsubsidized Microfinance Institutions. Economic Letters, 120(2), 174–176.CrossRefGoogle Scholar
  14. Dehejia, R., Montgomery, H., & Morduch, J. (2012). Do interest rates matter? Credit demand in the Dhaka slums. Journal of Development Economics, 97(2), 437–449.CrossRefGoogle Scholar
  15. Demirgüç-Kunt, A. & Klapper, L.F. (2012). Measuring financial inclusion: The global findex database. World Bank Policy Research Working Paper 6025.Google Scholar
  16. Dorfleitner, G., Leidl, M., Priberny, C., & von Mosch, J. (2013). What determines microcredit interest rates? Applied Financial Economics, 23(20), 1579–1597.CrossRefGoogle Scholar
  17. Driouchi, A. & Mertou, A. (2012). High implicit interest rates in the context of informal traditional housing transactions: Evidence from Morocco. MPRA paper 38732. University Library of Munich, Germany.Google Scholar
  18. Edelberg, W. (2006). Risk-based pricing of interest rates for consumer loans. Journal of Monetary Economics, 5(8), 2283–2298.CrossRefGoogle Scholar
  19. Galindo, A. & Jaramillo, C. (2011). A hellbound road paved with good intentions: Usury laws and bank competition in Colombia. Available at SSRN 1757994.Google Scholar
  20. González, A. (2010). Analyzing microcredit interest rates: A review of the methodology proposed by Mohammed Yunus. MIX Data Brief, 4, 1–6.Google Scholar
  21. Hartarska, V., & Nadolnyak, D. (2007). Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence. Applied Economics, 39(10), 1207–1222.CrossRefGoogle Scholar
  22. Hermes, N., & Lensink, R. (2011). Microfinance: Its impact, outreach, and sustainability. World Development, 39(6), 875–881.CrossRefGoogle Scholar
  23. Hermes, N., Lensink, R., & Meesters, A. (2011). Outreach and efficiency of microfinance institutions. World Development, 39(6), 938–948.CrossRefGoogle Scholar
  24. Hudon, M. (2007). Fair interest rates when lending to the poor. Ethics and Economics, 5(1), 1–8.Google Scholar
  25. Hudon, M. (2009). Should access to credit be a right? Journal of Business Ethics, 84(1), 17–28.CrossRefGoogle Scholar
  26. Hudon, M., & Sandberg, J. (2013). The ethical crisis in microfinance: Issues, findings, and implications. Business Ethics Quarterly, 23(4), 561–589.CrossRefGoogle Scholar
  27. International Monetary Fund. (2000). Monetary and financial statistics manual. Washington, D.C: International Monetary Fund.Google Scholar
  28. Jenkins, H. (2000). Commercial bank behavior and performance in micro and small enterprise finance. Harvard Institute for International Development Discussion Paper 741. Harvard University.Google Scholar
  29. Kumar, N. (2013). Cost components of interest rate charged by Indian self help groups financed by not-for profit microfinance institutions. Journal of Global Economy, 9(4), 302–322.Google Scholar
  30. Maudos, J., & Solís, L. (2009). The determinants of net interest income in the Mexican banking system: An integrated model. Journal of Banking & Finance, 33, 1920–1931.CrossRefGoogle Scholar
  31. Mendoza, R. U. (2011). Why do the poor pay more? Exploring the poverty penalty concept. Journal of International Development, 23(1), 1–28.CrossRefGoogle Scholar
  32. Mersland, R., & Strøm, R. Ø. (2009). Performance and governance in microfinance institutions. Journal of Banking & Finance, 33, 662–669.CrossRefGoogle Scholar
  33. Mersland, R., & Strøm, R. Ø. (2010). Microfinance mission drift? World Development, 38(1), 28–36.CrossRefGoogle Scholar
  34. Mia, A., & Chandran, V. G. R. (2016). Measuring financial and social outreach productivity of microfinance institutions in Bangladesh. Social Indicators Research, 127(2), 505–527.CrossRefGoogle Scholar
  35. Monzurul, H., Chishty, M., & Halloway, R. (2011). Commercialization and changes in capital structure in microfinance institutions: An innovation or wrong turn? Managerial Finance, 37(5), 414–425.CrossRefGoogle Scholar
  36. Morduch, J. (1999). The role of subsidies in microfinance: evidence from the Grameen Bank. Journal of Development Economics, 60(1), 229–248.CrossRefGoogle Scholar
  37. Morduch, J. (2000). The microfinance schism. World Development, 28(4), 617–629.CrossRefGoogle Scholar
  38. Prahalad, C. K., & Hammond, A. (2002). Serving the world’s poor, profitably. Harvard Business Review, 80(9), 48–59.Google Scholar
  39. Prahalad, C. K., & Hart, S. L. (2002). The fortune at the bottom of the pyramid. Strategy and Business, 26, 1–54.Google Scholar
  40. Prior, F., & Argandoña, A. (2009). Best practices in credit accessibility and corporate social responsibility in financial institutions. Journal of Business Ethics, 87(1), 251–265.CrossRefGoogle Scholar
  41. Roberts, P. W. (2013). The profit orientation of microfinance institutions and effective interest rates. World Development, 41, 120–131.CrossRefGoogle Scholar
  42. Rosenberg, R., González, A., & Narain, S. (2009). The new moneylenders: Are the poor being exploited by high microcredit interest rates? CGAP Occasional paper 15. Washington, D.C.: Consultative Group to Assist the Poor.Google Scholar
  43. Sama, L. M., & Casselman, R. M. (2013). Profiting from poverty: ethics of microfinance in BOP. South Asian Journal of Global Business Research, 2(1), 82–103.CrossRefGoogle Scholar
  44. Saunders, A., & Schumacher, L. (2000). The determinants of bank interest rate margins: an international study. Journal of International Money and Finance, 19(6), 813–832.CrossRefGoogle Scholar
  45. Servin, R., Lensink, R., & van den Berg, M. (2012). Ownership and technical efficiency of microfinance institutions: Empirical evidence from Latin America. Journal of Banking & Finance, 36(7), 2136–2144.CrossRefGoogle Scholar
  46. Smith A. (1937). The Wealth of Nations. New York (1st publ. 1776): Modern Library.Google Scholar
  47. Stigler, G. (1987). The theory of price (4th ed.). New York: Macmillan.Google Scholar
  48. Tchakoute-Tchuigoua, H. (2010). Is there a difference in performance by the legal status of microfinance institutions? The Quarterly Review of Economics and Finance, 50(4), 436–442.CrossRefGoogle Scholar
  49. Tsai, M.-C., Dwyer, R. E., & Tsa, R.-M. (2016). Does financial assistance really assist? The impact of debt on wellbeing, health behavior and self-concept in Taiwan. Social Indicators Research, 125(1), 127–147.CrossRefGoogle Scholar
  50. Valenzuela, L. (2002). Getting the recipe right: The experience and challenges of commercial bank downscalers. In D. Drake & E. Rhyne (Eds.), The commercialization of microfinance: Balancing business and development (pp. 46–74). West Hartford, Conn.: Kumarian Press.Google Scholar
  51. Waterfield, C. (2015). Advocating transparent pricing in microfinance: A Review of MFTransparency’s Work and a Proposed Future Path for the Industry. MicroFinance Transparency.Google Scholar
  52. Watkins, T. A. (2010). A framework for innovation roadmapping in microfinance information systems. Contemporary Studies in Economic and Financial Analysis, 92, 251–269.CrossRefGoogle Scholar
  53. Wichterich, C. (2012). The other financial crisis: Growth and crash of the microfinance sector in India. Development, 55(3), 406–412.CrossRefGoogle Scholar
  54. Yunus, M. (2007). Creating a world without poverty: Social business and the future of capitalism. New York: Public Affairs.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2016

Authors and Affiliations

  • Begoña Gutiérrez-Nieto
    • 1
  • Carlos Serrano-Cinca
    • 1
  • Beatriz Cuéllar-Fernández
    • 1
  • Yolanda Fuertes-Callén
    • 1
  1. 1.Department of Accounting and FinanceUniversity of ZaragozaSaragossaSpain

Personalised recommendations