TY - JOUR
T1 - Lender–entrepreneur relationships and credit risk
T2 - a global analysis of microfinance institutions
AU - Shahriar, Abu Zafar M.
AU - Garg, Mukesh
PY - 2017/11/1
Y1 - 2017/11/1
N2 - Prior research suggests that long-term relationships with microfinance institutions (MFIs) are necessary for sustained growth of microcredit-initiated small businesses. However, we present robust evidence that long-term lending relationships may worsen the credit risk of MFIs. Based on information on 1087 MFIs from 69 countries over the period of 2003–2014, we show that, at the initial stage, credit risk declines as an MFI makes more relationship-based loans, but after a certain level, default and delinquencies increase with the magnitude of relationships. We further show that the non-linear, U-shaped, association between relationship lending and credit risk is stronger (a) among small MFIs compared to that among large MFIs and (b) among MFIs that make individual loans compared to those making joint liability-based loans. We discuss policy implications of these findings.
AB - Prior research suggests that long-term relationships with microfinance institutions (MFIs) are necessary for sustained growth of microcredit-initiated small businesses. However, we present robust evidence that long-term lending relationships may worsen the credit risk of MFIs. Based on information on 1087 MFIs from 69 countries over the period of 2003–2014, we show that, at the initial stage, credit risk declines as an MFI makes more relationship-based loans, but after a certain level, default and delinquencies increase with the magnitude of relationships. We further show that the non-linear, U-shaped, association between relationship lending and credit risk is stronger (a) among small MFIs compared to that among large MFIs and (b) among MFIs that make individual loans compared to those making joint liability-based loans. We discuss policy implications of these findings.
KW - credit risk
KW - entrepreneurship
KW - lending relationships
KW - microfinance
UR - http://www.scopus.com/inward/record.url?scp=85027444008&partnerID=8YFLogxK
U2 - 10.1177/0266242617701189
DO - 10.1177/0266242617701189
M3 - Article
AN - SCOPUS:85027444008
VL - 35
SP - 829
EP - 854
JO - International Small Business Journal
JF - International Small Business Journal
SN - 0266-2426
IS - 7
ER -