Review of Finance Advance Access published online on April 9, 2009
Review of Finance, doi:10.1093/rof/rfp005
Franchising Microfinance*
1 Indian School of Business
2 UCLA Anderson School
Financial intermediaries worldwide are seeking mechanisms for participating in micro lending. Using informed "local capitalists" as bank's on-lenders fails due to borrowers' incentive to default with multiple credit sources. A coalition of local capitalists may not resolve the problem in the presence of a monopoly moneylender with superior skills in lending and enforcement. A credible competitive threat to the moneylender can only arise if the local capitalist coalition also provides information sharing benefits that lower their cost of lending vis-à-vis the moneylender. Franchising allows local capitalists to form such a coalition. We analyze conditions under which welfare-enhancing franchising would obtain.
JEL Classification: G21, D02
* The authors thank Vikram Akula (SKS Microfinance, India), Professor Mudit Kapoor (ISB), Vijay Mahajan (BASIX, India) Professor Jonathan Morduch (New York University) and Professor Robert Townsend (University of Chicago) for useful discussions at early stages of the development of the central idea for this paper and seminar participants at the Indian School of Business, Centre for Micro Finance at IFMR (Chennai), UCLA Anderson School, McCombs School of Business, University of Texas at Austin, Hebrew University and INSEAD for many useful comments on earlier drafts of this paper. An anonymous referee's comments significantly improved the model and the exposition of central ideas in the paper. The authors also thank Greg Casagrande and Nigel Burr of South Pacific Business Development (SPBD) Foundation in Samoa for many insightful discussions on how the concept of Franchising Microfinance can be practically implemented.