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The Role of Local Depositors in Controlling Expenses in Small‐Scale Financial Intermediation: An Empirical Analysis
Author(s) -
HOLLIS AIDAN,
SWEETMAN ARTHUR
Publication year - 2007
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.1468-0335.2007.00592.x
Subject(s) - loan , business , moral hazard , net interest income , financial intermediary , financial institution , operating expense , financial system , intermediation , finance , agency cost , net income , interest rate , capital (architecture) , economics , incentive , history , corporate governance , archaeology , microeconomics , shareholder
Using data on Irish loan funds, a nineteenth‐century quasi‐bank system, we explore how the capital structure affects managerial agency to impact non‐interest expenses. These organizations had no equity‐holders and were financed by deposits and ‘capital’, comprising donations and accumulated profits, creating problems of managerial moral hazard. Higher net income (before non‐interest expenses) is associated with higher salaries and other non‐interest expenses. More surprisingly, higher ‘capital’–deposit ratios led to higher expenses even after controlling for net income. While this institution is unique, the findings suggest that depositors could assist in controlling expenses in microfinance organizations.