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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Abu Zafar M. Shahriar & Luisa A. Unda & John P. Berns & Panunya Phatraphumpakdee, 2024. "Monitoring and Loan Pricing: Do Microfinance Institutions Extract Rents from Entrepreneurs?," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 14(03), pages 1-44, September.
    • Handle: RePEc:wsi:qjfxxx:v:14:y:2024:i:03:n:s2010139224500113
    DOI: 10.1142/S2010139224500113
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    More about this item

    Keywords

    Entrepreneurial finance; microcredit; monitoring; information advantage; interest rates;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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