Reasons for multiple borrowing and its impact on the repayment performance

1. Reasons for multiple borrowing and its impact on the repayment performance • PhD research project of Miriam Matzanke • supervised by Dr. Ana Marr and Dr. John Orchard • in cooperation with Financiera EDYFICAR, Peru

2. Agenda 1 Research topic Literature review Methodology Preliminary qualitative findings Structure of quantitative data 2 3 4 5

3. 1 Research topic Reasons for multiple borrowing and its impact on the repayment performance

4. 1 Research topic Back-ground • Microfinance is highly competitive • In Peru, diverse lenders compete for the microentre-preneurial clientele • The microfinance penetration measured as borrowers/poor population was 10.4% in 2010 (compared to 11.5% in Bolivia) • Several clients follow a multiple borrowing strategy • Use of a micro credit and simultaneously use of at least one additional loan from at least one different source Source: MixMarket, Country Profiles Bolivia and Peru, November 2010

5. 1 Research topic Research Question • What are the main reasons for clients to follow a multiple borrowing strategy? • Which impact does multiple borrowing have on the repayment performance of the clients? • Which factors influence the impact?

6. 2 Literature review Theore-tical literature • Hoff and Stiglitz (1998) touch the topic indirectly • competition reduces the effectiveness of reputation effects and the borrowers’ incentive to repay • degree of information sharing is crucial • McIntosh and Wydick (2005) • competition can cause borrowers to take multiple loans which impacts the repayment performance negatively • degree of information sharing is crucial

7. 2 Literature review Empirical literature Reasons • Two types: opportunity-driven and distress-driven • Not clear which reasons dominate • Combination of quantitative and qualitative data per client could deliver a more complete picture • Empirical literature Impact • Krishnaswamy (2007) finds a positive impact of multiple borrowing on the repayment performance, whereas Vogelgesang (2003) finds a two-fold influence structure • McIntosh, de Janvry and Sadoulet (2005) describe negative impact of competition on multiple borrowing

8. 2 Literature review Contri-bution of this study • Holistic approach to cover reasons for multiple borrowing and its impact in an environment with intense information sharing • Rigorous methodology

9. 3 Methodology Quanti-tative analyses • Data kindly provided by the Peruvian Financiera EDYFICAR • Comprehensive database including information on EDYFICAR loans and on the clients’ other loans • Objective is to quantify the impact of multiple borrowing on the repayment performance Quali-tative analyses • Data to be collected via interviews • with management and staff from the MFI • in-depth interviews with clients of the MFI • Combination with quantitative data for the same clients • Objective is to understand reasons for multiple borrowing

10. 4 Preliminary qualitative findings • Transparency in the Peruvian financial market is amazingly high • Comprehensive client data is provided by the Superintendencia and private companies • Clients with good repayment histories are easily identified by financial institutions Market

11. 4 Preliminary qualitative findings Reasons • Many clients would prefer to have a relationship with one single lender • Nevertheless, multiple borrowing is a frequently used strategy • When analyzing the reasons, the supply side has to be taken into account

12. 4 Preliminary qualitative findings Repay-ment • According to EDYFICAR’s internal analyses, multiple borrowing is likely to have a negative impact on the repayment performance • But there are clients that manage multiple loans successfully • What are the determining factors?

13. 5 Structure of quantitative data Loan at t=1 with MFI Other loans at t=1 in financial system Loan information, e.g. interest rate, amount etc. Information on client’s situation in the system, e.g. number of creditors, number of loans, total debt Client 1 Repayment information, e.g. schedule, punctuality of payments Attributes of the client, e.g. name, gender, age, business sector etc. Loan at t=2 with MFI Other loans at t=2 in financial system Loan information, e.g. interest rate, amount etc. Information on client’s situation in the system, e.g. number of creditors, number of loans, total debt Repayment information, e.g. schedule, punctuality of payments

14. Questions? Which are further aspects that should be considered? Thank you for your attention!