Founanou, Mathurin and Ratsimalahelo, Zaka (2012): Incentives, Supervision and Regulation of Microfinance Institutions in the developing countries.
Download (120kB) | Preview
We analyze the optimal regulation of a MFI that has private information on the intrinsic quality of its loan portfolio (adverse selection) and where the MFI’s choice of effort to improve this quality cannot be observed by the regulator (moral hazard). In designing optimal contracts the regulator faces a tradeoff between inducing proper incentives for efficient MFI and costs of regulation in terms of leaving an informational rent for a high quality MFI. We identify conditions for the optimal incentive contract and show that, not surprisingly, these contracts depend on the accuracy of the supervisor’s signal, the likelihood of facing a high quality MFI, and the cost of supervision. However, since improving the accuracy of supervision is costly, even in the optimal monitoring scheme there generally exists a positive probability of MFI failure. The content of information disclosure is characterized by the optimal monitoring scheme.
|Item Type:||MPRA Paper|
|Original Title:||Incentives, Supervision and Regulation of Microfinance Institutions in the developing countries|
|Keywords:||Microfinance institution; adverse selection; moral hazard; regulation; supervision; optimal incentive contracts|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages
|Depositing User:||Zaka Ratsimalahelo|
|Date Deposited:||19. Sep 2012 11:34|
|Last Modified:||26. Aug 2015 02:36|
Berenbach, S.; and C. Churchill, 1997. Regulation and Supervision of Microfinance institutions: Experience from Latin America, Asia and Africa. The Microfinance Network Occasional Paper N°1.
Chavez, R. and C.Gonzalez-Vega, 1993. Should principles of regulation and prudential supervision be different for microenterprise finance organizations? GEMINI Working Paper, N° 38.
Christen, R. P., T. Lyman and R; Rosenberg, 2003. Guiding Principles for Regulation and Supervision of Microfinance, Washington, DC: Consulting Group to Assist the Poor.
CGAP, 2003. Consensus Microfinance Policy Guidance: Regulation and Supervision. Washington D.C. USA.
Cordella, T. and E.L. Yeyati, 1998. Public disclosure and bank failures, IMF Staff Papers nr 1, International Monetary Fund.
Cuevas C.E., and K.P. Fischer, 2006. Regulation and Supervision of Cooperative Institutions: The debate over Delegated and Auxiliary Supervision. The World Bank Group, Issue N°. 12.
Cull, R.; A. Demirgüç-kunt, and J. Morduch, 2009a. Microfinance Meets the Market. Journal of Economic Perspectives, 23 (1): pp. 167- 192.
Cull, R.; A. Demirgüç-kunt, and J. Morduch, 2009b. Does Regulatory Supervision curtail Microfinace Profitability and outreach? Policy Research Working Paper 4748, The World Bank.
Dewatripont, M. and J. Tirole, 1994. The prudential regulation of banks. MIT Press.
Freixas, X. and J-C. Rochet, 1997. The microeconomics of banking. MIT Press.
Giammarino, R.M., T.R. Lewis, and D.E.M. Sappington, 1993. An incentive approach to banking regulation. Journal of Finance, 48, 1523–1542.
Hartarstka, V., 2005, “Governance and Performance of Microfinance Institutions in Central and Eastern Europe and the Newly Independent States”. World Development, 33 (10): pp. 1627-1643.
Hartarska, V., and D. Nadolnyak 2007, “ Do Regulated Microfinance Institutions A chieve Better Sustainability and outreach? Cross-Country Evidence”. Applied Economics,39 (10-12): pp. 1207-1222
Kofman, F. and J. Lawarrée, 1993. Collusion in hierarchical agency. Econometrica, 61, 629–636.
Laffont, J-J., and J. Tirole, 1986. Using cost observation to regulate firms. Journal of Political Economy 94, 614-641.
Laffont, J-J. and J. Tirole, 1993. A theory of incentives in procurement and regulation. MIT Press.
Llewellyn, D, 1986. Regulation and Supervision of financial institutions. London, the Institute of Bankers.
Llewellyn, D, 1999. The Economic Rationale for Financial regulation. Occasional Paper Series, FSA, London, FSA.
Ndambu, J., 2011, “Does regulation increase microfinance performance in Sub-Saharan Africa? Technical Note N° 3/2011. Frankfurt School of Finance & management.
Rochet, J-C, 1992. Towards a theory of optimal banking regulation. Cahiers économiques et monetaires nr 40, Banque de France.
Van Gruening, H., J. Gallardo and B. Randhawa, 1999. A Framework for Regulating Microfinance Institutions. Document de travail 206. Banque mondiale, Washington
Vogel, R. C., A. Gomez and T, Fitzgerald, 2000. Microfinance Regulation and Supervisión. Concept Paper. USA. Microenterprise Best Practices