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When pro‐poor microcredit institutions favour richer borrowers: A moral hazard story

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  • Sara Biancini
  • David Ettinger
  • Baptiste Venet

Abstract

We suggest an explanation for the existence of “mission drift,” the tendency for Microfinance Institutions (MFIs) to lend money to wealthier borrowers rather than to the very poor. We focus on the relationship between MFIs and external funding institutions. We assume that both the MFIs and the funding institutions are pro‐poor. However, asymmetric information on the effort chosen by the MFI to identify higher‐quality projects may increase the share of loans attributed to wealthier borrowers. This occurs because funding institutions have to build incentives for MFIs, creating a trade‐off between the quality of the funded projects and the attribution of loans to poorer borrowers. Quand les institutions de microcrédit en faveur de la lutte contre la pauvreté favorisent les emprunteurs plus riches ‐ une histoire d'aléa de moralité. Nous proposons une explication à l'existence de la « dérive de la mission », la tendance des institutions de microfinance (IMF) à prêter de l'argent à des emprunteurs plus aisés plutôt qu'à des emprunteurs très pauvres. Nous nous concentrons sur la relation entre les IMF et les institutions de financement externe. Nous supposons que les IMF et les institutions de financement sont en faveur de la lutte contre la pauvreté. Toutefois, une information asymétrique sur l'effort choisi par l'IMF pour cerner les projets de meilleure qualité peut augmenter la part des prêts attribués aux emprunteurs plus aisés. Cela s'explique par le fait que les institutions de financement doivent mettre en place des mesures incitatives pour les IMF, créant ainsi un compromis entre la qualité des projets financés et l'attribution de prêts aux emprunteurs plus pauvres.

Suggested Citation

  • Sara Biancini & David Ettinger & Baptiste Venet, 2024. "When pro‐poor microcredit institutions favour richer borrowers: A moral hazard story," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 57(1), pages 225-242, February.
    • Handle: RePEc:wly:canjec:v:57:y:2024:i:1:p:225-242
    DOI: 10.1111/caje.12694
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    References listed on IDEAS

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