Reasons for multiple borrowing and its impact on the repayment performance

PhD research project of Miriam Matzankesupervised by Dr. Ana Marr and Dr. John Orchardin cooperation with Financiera EDYFICAR, Peru

Agenda

Research topic

Literature review

Methodology

Preliminary qualitative findings

Structure of quantitative data

1

2

3

4

5

Reasons for multiple

borrowing and its impact on

the repayment performance

1 Research topic

• Microfinance is highly competitive

• In Peru, diverse lenders compete for the microentre-preneurial clientele

• The microfinance penetration measured as borrowers/poor population was 10.4% in 2010 (compared to 11.5% in Bolivia)

• Several clients follow a multiple borrowing strategy

Use of a micro credit and simultaneously use of at least one additional loan from at least one different source

Back-ground

1

Source: MixMarket, Country Profiles Bolivia and Peru, November 2010

Research topic

1. What are the main reasons for clients to follow a multiple borrowing strategy?

2. Which impact does multiple borrowing have on the repayment performance of the clients?

• Which factors influence the impact?

1

Research Question

Research topic

Hoff and Stiglitz (1998) touch the topic indirectly• competition reduces the effectiveness of reputation

effects and the borrowers’ incentive to repay• degree of information sharing is crucial

McIntosh and Wydick (2005)• competition can cause borrowers to take multiple loans

which impacts the repayment performance negatively• degree of information sharing is crucial

Literature review2

Theore-tical

literature

Literature review2

Empirical literature

Reasons

• Two types: opportunity-driven and distress-driven

• Not clear which reasons dominate

Combination of quantitative and qualitative data per client could deliver a more complete picture

Empirical literature

Impact

• Krishnaswamy (2007) finds a positive impact of multiple borrowing on the repayment performance, whereas Vogelgesang (2003) finds a two-fold influence structure• McIntosh, de Janvry and Sadoulet (2005) describe

negative impact of competition on multiple borrowing

Literature review2

Contri-bution of this study

• Holistic approach to cover reasons for multiple borrowing and its impact in an environment with intense information sharing

• Rigorous methodology

• Data to be collected via interviews with management and staff from the MFI in-depth interviews with clients of the MFI

• Combination with quantitative data for the same clients•Objective is to understand reasons for multiple borrowing

Quali-tative

analyses

• Data kindly provided by the Peruvian Financiera EDYFICAR• Comprehensive database including information on

EDYFICAR loans and on the clients’ other loans• Objective is to quantify the impact of multiple borrowing on

the repayment performance

Quanti-tative

analyses

Methodology3

• Transparency in the Peruvian financial market is amazingly high

• Comprehensive client data is provided by the Superintendencia and private companies

• Clients with good repayment histories are easily identified by financial institutions

Market

Preliminary qualitative findings4

• Many clients would prefer to have a relationship with one single lender

• Nevertheless, multiple borrowing is a frequently used strategy

When analyzing the reasons, the supply side has to be taken into account

Reasons

Preliminary qualitative findings4

• According to EDYFICAR’s internal analyses, multiple borrowing is likely to have a negative impact on the repayment performance

• But there are clients that manage multiple loans successfully

What are the determining factors?

Repay-ment

Preliminary qualitative findings4

Attributes of the client, e.g. name, gender, age, business sector etc.

Client 1

Loan information, e.g. interest rate, amount etc.

Loan at t=1 with MFI

Repayment information, e.g. schedule, punctuality of payments

Information on client’s situation in the system, e.g. number of creditors, number of loans, total debt

Other loans at t=1 in financial system

Loan information, e.g. interest rate, amount etc.

Loan at t=2 with MFI

Repayment information, e.g. schedule, punctuality of payments

Information on client’s situation in the system, e.g. number of creditors, number of loans, total debt

Other loans at t=2 in financial system

Structure of quantitative data5

Questions?

Which are further aspects that should be considered?

Thank you for your attention!