SALVAGUARDIA A LAS IMPORTACIONES DE CEBOLLA PROVINIENTES

Current literature lists two primary areas where diversification may be of interest to smaller financial intermediaries: the discussion of potential diversification benefits in banking, as well as its impact on small business lending, both of which are potentially relevant for the microfinance industry. Smaller banks are suggested to have an advantage in extending loans to smaller business firms, because they are able to process soft information better and draw on informational advantages compared to larger companies. Some studies observe organizational diseconomies of scale, as well as increased expertise in locally scattered

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markets amongst smaller institutions, and with consumers that will often prefer organisations with stronger local ties (see, for example, Stiroh, 2004; Pilloff and Rhoades, 1996; deYoung, 1999; Berger and Humphrey, 1997; and Jensen, 2009).

While looking at the traditional banking sector, DeYoung notes that the share of assets in small business lending is negatively correlated with the size of the banks studied, and Berger et al. suggests that smaller financial intermediaries make use of fundamentally different lending methodologies than larger intermediaries do (DeYoung et al., 1999; Berger et al., 1993). Additionally Pilloff and Rhoades find that larger financial intermediaries do not have net competitive advantages when compared with smaller banks (Pilloff and Rhoades, 2002). All of these findings are in line with what is generally observed within the microfinance sector, where unique lending methodologies are employed to reach customers otherwise left unserved by larger financial intermediaries (see, for example, Armendáriz and Morduch, 2005; Hermes and Lesink, 2007).

With regulation being weak and often poorly implemented in much of the main market for microfinance, it may be assumed that microfinance institutions might take advantage of diversification to reduce risk and increase their revenue stream (Stiroh, 2004; Morgan and Samolyk, 2003). However, the empirical evidence from traditional banking literature of the correlation between bank risk and diversification is not conclusive. Some empirical literature finds a negative relationship between an expansion of business activities and risk reduction, while some observe positive correlations between risk and diversification (DeYoung and Roland, 2001; Templeton and Severiens, 1992).57 Stiroh finds that diversification for small businesses into new business activities and operations do not create diversification benefits for the small financial intermediaries. Specifically, the study finds negative correlations between risk-adjusted performance and diversification in commercial and industrial lending. Stiroh notes that concentrated loan portfolios are associated with lower risk-adjusted profits, but finds that this only happens if the intermediary expands within already existing

57 _{An area in which literature within traditional banking has found evidence of diversification gains, is the} expansion of business revenue streams of banks into non-bank activities such as insurance (see, for example, Saunders and Walter, 1994; Boyd and Runkle, 1993). For the microfinance sector, in which some established institutions are currently expanding into micro-insurance, this is interesting, but not the focus of this particular study.

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areas of expertise and methodology (Stiroh, 2004). In a microfinancial context, it thus may be of benefit for the MFI to expand its loan product range within an area and using a methodology that they are already familiar with, but steer clear of expansion into unfamiliar areas and methodologies, in which the wants and needs of the client base is fundamentally different from their previous lending activities.

The use of alternative lending strategies to address the weak information available on borrowers, as well as the lack of adequate collateral as security, are both key traits which set microfinance apart from traditional banking. Far from just being a development tool to address poverty concerns in developing and emerging markets, it is today also finding increased use in more developed environments. Microfinance initiatives are used to reach parts of the population which are considered too risky to be served by more traditional financial intermediaries, and because of this, are left without access to capital.

If we want to understand the potential impact of MFIs as banking institutions, we need to understand what factors carry significant influence on its ability to function as a financial intermediary. We need to look closer at the traits which make MFIs unique, and understand their impact on MFIs’ ability to create liquidity for the market.

5.2.

Research Question and Hypotheses

This chapter therefore takes a closer look at the impact of lending strategies upon the levels of liquidity created by the MFI. In particular, I am interested in the effect of diversification of lending approaches upon liquidity creation, and especially whether this applies across all lending strategies or for only joint lending methodologies in particular. The results will help shed light on how and to what extent MFIs are able to help funnel liquidity into their surrounding financial markets.

As seen in the previous chapter, MFIs appear to be able to create liquidity on par with traditional intermediaries, despite the increased risk from collateral-less lending, and unstable external environments. Based on this, and the gap in existing literature identified earlier in this chapter, this chapter seeks to answer the following question:

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How do microfinance institutions successfully create liquidity for the market, without taking undue risk?

a) What is the impact of specialisation and joint lending strategies on levels of liquidity creation?

b) What are other unique characteristics of MFIs, which may drive liquidity creation in microfinance?

5.2.1. Hypotheses

Based on the existing literature, it is clear that microfinance institutions are able to successfully navigate around the obstacles usually facing financial institutions in developing regions. The MFIs manage to address issues arising from high transaction cost, the threat of adverse selection, moral hazard as well as the cost and time of adequate monitoring and enforcement. The primary tool used to address these, is the use of joint lending strategies to lower both transaction and auditing costs, as well addressing the challenges associated with a weak financial market into strength, by using access to future loans as both carrot and stick (Armendáriz and Morduch, 2010; Ghatak and Guinnane, 1999).

The ability of MFIs to successfully ensure repayment and reduce risk is likely to be directly related to their ability to produce liquidity for the market. However, as we saw in the previous chapter, not all of the traditional impact variables have equally consistent impact in microfinance. While the impact of capital remains significant and negative, size is less consistent across years and measurements, though still with consistent negative correlation to LC. Deposit insurance does not appear to be correlated with levels of liquidity creation, lending credence to Schaefer and Deep’s proposal that the impact of liquidity creation is not explained by the threat of bank runs as Diamond and Dybvig proposed, but rather through the level of capital risk (Schaefer and Deep, 2004; Diamond and Dybvig, 1983; Diamond and Rajan, 2001).

Traditional bank risk, here measured as the level of portfolio at risk, is negatively correlated with LC, and largely insignificant, suggesting that the drivers of liquidity creation in microfinance should be found elsewhere. The macro-environment, in particular variables

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impacting the regulatory framework, is studied in further detail in chapter 6, while this chapter is particularly interested in institutional characteristics driving liquidity creation.

H1a: Specialised lending is expected to be positively correlated with LC.

While existing literature on specialisation in microfinance is limited, newer research in diversification amongst smaller financial institutions suggest that smaller institutions may not receive the same diversification benefits as larger institutions do, and find this to be true especially for commercial and industrial lending (Stiroh, 2004). For this reason, I expect diversification gains to be either weak or absent for microfinance institutions in general. Specialisation of lending methodologies is therefore likely to be positively correlated with levels of liquidity created by the MFIs.

H1b: Joint lending is expected to be positively correlated with LC.

Based on the theory and empirical findings outlined above, as well as in chapter 2, joint lending appears to have a mitigating impact on risk, as well as a general positive relationship on repayment rates, especially for group loans, where members know each other well, but are not directly related.

The previous chapter showed no significant impact from deposit insurance, and capital risk appeared to be negatively correlated with LC in microfinance. I thus expect joint lending to be positively correlated with levels of LC, due to the risk reducing effect of joint lending strategies proposed in chapter 2 (e.g. Armendáriz and Morduch, 2010; Ghatak, 1999).

H2: other unique characteristics driving liquidity in microfinance are organisational type and the presence regulatory framework. Both are expected to be positively correlated with LC.

Based on the consistent results observed in the previous chapter, I expect the relationship between LC and regulation to be strongly positive. Unless significant diversions from

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previous results are observed, it is not something I discuss in detail in this chapter. Instead, I take a much closer look at aspects of the regulatory framework and microfinance in the following chapter.

With regard to organisational type, I expect to see similar positive correlations between NGOs and levels of liquidity creation. The life-cycle theory outlined in chapter 2 states that MFIs often display a tendency to change over time, from NGOs to more commercial institutions as they mature. As smaller institutions and NGOs tend to create more liquidity, the correlation between age and LC should be negative and significant, as should OSS. So far however, neither has displayed convincing levels of significance.

5.3.

Methodology

To answer the research question and sub-questions stated above, I have run 3 fixed effects models, in which a number of characteristics unique to microfinance are estimated. Following a similar methodology to the previous chapter, I use panel data from MIX here specifically to estimate the institutional impact of specialisation and lending strategies on levels of liquidity created by MFIs.

While I control for general traits which traditional banking literature suggests are relevant for the creation of liquidity in financial institutions, I am here particularly interested in the MFI characteristics which are unique to the microfinance sector.58

One of the key traits setting MFIs apart from other financial institutions, and which literature highlights as a way to mitigate risk in the face of lacking collateral, is the innovative lending strategies employed in MFIs. I am both interested in the impact of diversification in chosen lending strategies, as well as the impact of the individual approach. For this reason, my key independent variables measure the effect of diversification in the MFI loan practices, as well as measuring the specific impact of joint liability, group and individual lending on the creation of liquidity.

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