Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?

Regulation allows microfinance institutions to evolve more fully into banks, particularly for institutions aiming to take deposits. But there are potential trade-offs. Complying with regulation and supervision can be costly. The authors examine the implications for the institutions profitability and their outreach to small-scale borrowers and women. The tests draw on a new database that combines high-quality financial data on 245 of the world s largest microfinance institutions with newly-constructed data on their prudential supervision. Ordinary least squares regressions show that supervision is negatively associated with profitability. Controlling for the non-random assignment of supervision via treatment effects and instrumental variables regressions, the analysis finds that supervision is associated with substantially larger average loan sizes and less lending to women than in ordinary least squares regressions, although it is not significantly associated with profitability. The pattern is consistent with the notion that profit-oriented microfinance institutions absorb the cost of supervision by curtailing outreach to market segments that tend to be more costly per dollar lent. By contrast, microfinance institutions that rely on non-commercial sources of funding (for example, donations), and thus are less profit-oriented, do not adjust loan sizes or lend less to women when supervised, but their profitability is significantly reduced.

Bibliographic Details

Main Authors:	Cull, Robert, Demirgüç-Kunt, Asli, Morduch, Jonathan
Language:	English
Published:	2009-06-01
Subjects:	ACCESS TO FINANCE, ACCOUNTING, ADMINISTRATIVE COSTS, AFFILIATE, ASSET MANAGEMENT, ASSET PORTFOLIOS, AVERAGE COSTS, BALANCE SHEET, BANK LENDER, BANK LENDING, BANK POLICY, BANK REGULATION, BANK RESTRUCTURING, BANK SUPERVISION, BANKERS ASSOCIATION, BANKING INDUSTRY, BANKING LAW, BANKING REGULATIONS, BANKS, BIG BANK, BIG BANKS, BORROWING, BUDGET CONSTRAINTS, CALCULATIONS, CAPITAL COSTS, CHECKS, COMMERCIAL BORROWING, COMMUNITY BANKS, COMPLIANCE COSTS, CONSUMER, CONSUMER CREDIT, CONSUMER PROTECTION, CONSUMER PROTECTION LAWS, CONVENTIONAL BANK, CONVENTIONAL BANK LOANS, COOPERATIVES, CREDIT INFORMATION, CREDIT INFORMATION SYSTEMS, CREDIT RISK, CREDIT UNIONS, DEPOSIT, DEPOSIT INSURANCE, DEPOSITORS, DEPOSITS, DEPRECIATION, DEVELOPING COUNTRIES, DIVIDENDS, DUMMY VARIABLE, DUMMY VARIABLES, EARNINGS, ECONOMIES OF SCALE, ELECTRONIC FUND, EMPLOYEE, EQUAL AMOUNT, EQUAL CREDIT, EQUAL CREDIT OPPORTUNITY, EQUATIONS, EXCLUSION, EXOGENOUS VARIABLES, EXPENSE RATIOS, EXTERNAL AUDITORS, FEDERAL RESERVE, FEDERAL RESERVE SYSTEM, FINANCIAL DATA, FINANCIAL DEVELOPMENT, FINANCIAL INFORMATION, FINANCIAL INSTITUTION, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIARIES, FINANCIAL PERFORMANCE, FINANCIAL POSITION, FINANCIAL SECTOR, FINANCIAL SECTOR POLICY, FINANCIAL SELF-SUFFICIENCY, FINANCIAL SELF-SUSTAINABILITY, FINANCIAL SERVICES, FINANCIAL STATEMENT, FINANCIAL STATEMENTS, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FIXED ASSETS, FORMAL FINANCIAL INSTITUTIONS, FRAUD, FUNDING SOURCES, FUTURE RESEARCH, GENERAL PUBLIC, GNP, GNP PER CAPITA, HIGH INTEREST RATES, HOUSEHOLDS, INCOME STATEMENTS, INFLATION, INFLATION RATE, INFORMATION SERVICES, INSTITUTIONAL DEVELOPMENT, INSTRUMENT, INSURANCE AGENCY, INTEREST INCOME, INTEREST PAYMENTS, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, JOINT LIABILITY, LABOR COSTS, LARGE BANKS, LENDER, LENDERS, LINES OF CREDIT, LOAN, LOAN OFFICERS, LOAN PORTFOLIO, LOAN QUALITY, LOAN SIZE, LOAN SIZES, LOANS TO INDIVIDUALS, LOANS TO WOMEN, LONG-TERM LIABILITIES, MACROECONOMIC CONTEXT, MACROECONOMIC CONTROLS, MARKET INTEREST RATES, MFI, MFIS, MICROCREDIT, MICROENTERPRISES, MICROFINANCE, MICROFINANCE INSTITUTION, MICROFINANCE INSTITUTIONS, MICROFINANCE REGULATION, NET OPERATING INCOME, NET PROFIT, NON-PERFORMING LOANS, NONPERFORMING LOANS, OPERATING COST, OPERATING EXPENSES, OPERATING REVENUE, ORGANIZATIONAL STRUCTURE, ORGANIZATIONAL STRUCTURES, OUTREACH, OWNERSHIP STRUCTURE, PER CAPITA INCOME, POOR BORROWERS, PORTFOLIO QUALITY, PRIVATE BANKS, PROFITABILITY, PRUDENTIAL REGULATION, PRUDENTIAL REGULATIONS, PRUDENTIAL SUPERVISION, RAPID GROWTH, RATE OF INTEREST, REAL GDP, REAL INTEREST, REGIONAL DUMMIES, REGIONAL DUMMY, REGULATORY AUTHORITIES, REGULATORY AUTHORITY, REORGANIZATION, REPAYMENT, REPAYMENT RATES, RESERVES, RETAINED EARNINGS, RETURN, RETURN ON ASSETS, RETURNS, RURAL BANKS, SAVINGS, SENIOR, SHAREHOLDER, SHAREHOLDERS, SMALL LOANS, SOLIDARITY LENDING, SOURCES OF FUNDS, START-UP, START-UP COSTS, SUPERVISORY AGENCY, SUPERVISORY AUTHORITIES, SUPERVISORY AUTHORITY, SUPERVISORY POWERS, TAX, TECHNICAL ASSISTANCE, TIME DEPOSITS, VILLAGE, VOLUNTARY DEPOSITS, WOMEN BORROWERS,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090601114132 https://hdl.handle.net/10986/4139
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