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2017-06-13 - Colloque/Présentation - communication orale - Anglais - 24 page(s)

Godfroid Cécile , "Relationship Lending in Microfinance: How does it Impact Client Dropouts?." in 5th European Microfinance Research Conference , Portsmouth, UK, 2017

  • Codes CREF : Economie des PVD (DI4375), Management (DI4360)
  • Unités de recherche UMONS : Economie et gestion de l'entreprise (W742)
  • Instituts UMONS : Institut de Recherche en Développement Humain et des Organisations (HumanOrg)
  • Centres UMONS : Microfinance (CERMI)

Abstract(s) :

(Anglais) In the microfinance industry, client retention has been identified as a critical factor for both social performance and financial sustainability of microfinance institutions (MFIs). Undeniably, maintaining clients help MFIs reducing administrative costs and loan defaults. Moreover, client retention has been included as one of the social indicators in the United States Agency for International Development (USAID) and in the microfinance industry’s Social Performance Task Force (SPTF) as it signals that clients are satisfied with the services and products offered. Given the advantages offered by client retention, it seems essential to analyze the factors that can explain client dropouts in the microfinance sector. However, this field remains poorly documented in the literature. Within the few studies on this topic, some of them have shown that client exits may be mainly explained by attributes linked to clients or their business, attributes of the services offered by the MFI, loan officer attributes, or external shocks. In this study, we have decided to focus on factors linked to the relationship clients have with their loan officer to analyze client dropouts. We argue that without a close relationship between the client and his/her loan officer, microfinance may lose its reason of being and clients may be negatively affected. This close relationship is made possible through relationship lending referring to « the process of collecting private, customer-specific information on potential borrowers, and then using it to engage in profitable banking activities » (Scott, 2006). This type of relationship was mainly studied in the banking industry. It presents several advantages either for the borrower or for the lender. For the lender, it can reduce information asymmetry problems as the banks obtain information about the borrower’s repayment history (Diamond, 1991). As asymmetry of information may be a particular problem when dealing with the poor people who are active in the informal economy and often lack of collateral, reducing this barrier by relationship lending appears to be essential for including them financially. For the borrowers, Gwinner et al. (1998) explained that users involved in long-term relationship promoted by relationship-lending may benefit from higher confidence in the service provider, from social benefits like the impression to be unique, and from a special treatment in terms of price reduction for example. While some studies on relationship lending often consider the relation between the bank and the client without taking the role of loan officer into account, others spotlight the importance of this actor. We argue that when analyzing relationship lending in the microfinance sector, loan officers are particularly crucial as microfinance credit agents represent the key link and often the sole point of contact between the client and the MFI. Furthermore, they are mainly responsible of attracting new clients, studying loan applications, advising clients and monitoring borrowers, reducing therefore information asymmetries. Considering all of this literature, this study tries to answer the following research question: “What is the impact of relationship lending on client dropouts in microfinance?” To conduct our study, we built a database from a microfinance institution active in Ethiopia which offers 65% of its credits to the agricultural sector. This large offer to agricultural clients is not surprising as Ethiopia is one of the countries with the largest percentage of the rural population compared to the total population (81%). We assume that financial inclusion of rural and agricultural clients in Ethiopia may be particularly negatively affected when they exit a MFI. Indeed, because of the lack of concurrence in the microfinance sector in these regions, clients may face difficulties to find another MFI to deal with. Moreover, we argued that relationship lending may be particularly attractive in rural areas because of the high level of information asymmetries in those regions. In this study, we used as a proxy for relationship lending the ratio between the number of different loan officers a client had over the time period of this study and the number of the total transactions of each client with the MFI over the time period of this study. We assumed that the more the number of different loan officers a client had compared to the number of transactions he had with the MFI, the less intensive relationship lending is. Using a logistic regression, our preliminary results demonstrate that relationship lending decreases the probability for the client to leave the MFI, in line with what we expected. Moreover, our results also show that rural clients have a lower probability to leave the institution than urban clients, certainly because there are fewer other microfinance institutions in rural areas than in urban ones. Finally, women appear to be less incline to leave the MFI than men. We can conclude that MFIs, particularly those operating in rural areas, which have a high level of dropouts should especially pay attention to loan officers’ retention as a leave of a loan officer may induce some clients to drop out. Even if staff rotation may have some advantages in terms of preventing fraud, this does not seem to be the best strategy to retain clients.

(Anglais) In the microfinance industry, client retention has been identified as a critical factor for both social performance and financial sustainability of microfinance institutions (MFIs). Undeniably, maintaining clients help MFIs reducing administrative costs and loan defaults. Moreover, client retention has been included as one of the social indicators in the United States Agency for International Development (USAID) and in the microfinance industry’s Social Performance Task Force (SPTF) as it signals that clients are satisfied with the services and products offered. Given the advantages offered by client retention, it seems essential to analyze the factors that can explain client dropouts in the microfinance sector. However, this field remains poorly documented in the literature. Within the few studies on this topic, some of them have shown that client exits may be mainly explained by attributes linked to clients or their business, attributes of the services offered by the MFI, loan officer attributes, or external shocks. In this study, we have decided to focus on factors linked to the relationship clients have with their loan officer to analyze client dropouts. We argue that without a close relationship between the client and his/her loan officer, microfinance may lose its reason of being and clients may be negatively affected. This close relationship is made possible through relationship lending referring to « the process of collecting private, customer-specific information on potential borrowers, and then using it to engage in profitable banking activities » (Scott, 2006). This type of relationship was mainly studied in the banking industry. It presents several advantages either for the borrower or for the lender. For the lender, it can reduce information asymmetry problems as the banks obtain information about the borrower’s repayment history (Diamond, 1991). As asymmetry of information may be a particular problem when dealing with the poor people who are active in the informal economy and often lack of collateral, reducing this barrier by relationship lending appears to be essential for including them financially. For the borrowers, Gwinner et al. (1998) explained that users involved in long-term relationship promoted by relationship-lending may benefit from higher confidence in the service provider, from social benefits like the impression to be unique, and from a special treatment in terms of price reduction for example. While some studies on relationship lending often consider the relation between the bank and the client without taking the role of loan officer into account, others spotlight the importance of this actor. We argue that when analyzing relationship lending in the microfinance sector, loan officers are particularly crucial as microfinance credit agents represent the key link and often the sole point of contact between the client and the MFI. Furthermore, they are mainly responsible of attracting new clients, studying loan applications, advising clients and monitoring borrowers, reducing therefore information asymmetries. Considering all of this literature, this study tries to answer the following research question: “What is the impact of relationship lending on client dropouts in microfinance?” To conduct our study, we built a database from a microfinance institution active in Ethiopia which offers 65% of its credits to the agricultural sector. This large offer to agricultural clients is not surprising as Ethiopia is one of the countries with the largest percentage of the rural population compared to the total population (81%). We assume that financial inclusion of rural and agricultural clients in Ethiopia may be particularly negatively affected when they exit a MFI. Indeed, because of the lack of concurrence in the microfinance sector in these regions, clients may face difficulties to find another MFI to deal with. Moreover, we argued that relationship lending may be particularly attractive in rural areas because of the high level of information asymmetries in those regions. In this study, we used as a proxy for relationship lending the ratio between the number of different loan officers a client had over the time period of this study and the number of the total transactions of each client with the MFI over the time period of this study. We assumed that the more the number of different loan officers a client had compared to the number of transactions he had with the MFI, the less intensive relationship lending is. Using a logistic regression, our preliminary results demonstrate that relationship lending decreases the probability for the client to leave the MFI, in line with what we expected. Moreover, our results also show that rural clients have a lower probability to leave the institution than urban clients, certainly because there are fewer other microfinance institutions in rural areas than in urban ones. Finally, women appear to be less incline to leave the MFI than men. We can conclude that MFIs, particularly those operating in rural areas, which have a high level of dropouts should especially pay attention to loan officers’ retention as a leave of a loan officer may induce some clients to drop out. Even if staff rotation may have some advantages in terms of preventing fraud, this does not seem to be the best strategy to retain clients.