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Does Institutional Linkage of Bank‐ MFI Foster Inclusive Financial Development Even in the Presence of MFI Frauds?
Author(s) -
Ho Shirley J.,
Mallick Sushanta K.
Publication year - 2017
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12124
Subject(s) - linkage (software) , microfinance , collusion , moral hazard , credit rationing , adverse selection , business , finance , corporate governance , financial system , economics , incentive , industrial organization , market economy , economic growth , interest rate , biochemistry , chemistry , gene
Abstract Growing reports indicate the presence of frauds in microfinance institutions ( MFI s), as it can occur in any organization in countries where there are weak institutions, weak rule of law, and fraudulent behavior of MFI officers for personal gain. While there are increasing calls to launch financial governance of these NGO MFI s, there are concerns as to whether frauds of this nature can damage MFI s’ contributions to the credit market, particularly in the bank‐linkage program where the NGO MFI s act as third party intermediary. The purpose of this study was to analyze the collusion decisions faced by MFI s and their impact on the bank‐linkage program, which has been offered as a solution to help overcome adverse selection and moral hazard problems in the credit market by harnessing local information via MFI s. Our results show that even when there is a chance of collusion between MFI and the borrower, the linkage between MFI and bank can still increase the probability that the borrower puts in full effort, and therefore decreases the probabilities of both credit rationing and strategic default. Such linkage in financing viable projects can make micro‐financing more effective in achieving inclusive financial development and thereby poverty reduction in rural areas.