Published by the Journal of Banking and Finance; October 2019; 38 pages; available at https://www.researchgate.net/publication/336539379_Geographic_diversification_and_credit_risk_in_microfinance
In this paper, the authors use 18 years of data on 657 microfinance institutions (MFIs) in 88 countries to investigate whether there is a correlation between MFIs’ credit risk and their geographic diversification. The authors measure credit risk using indicators including 30-day portfolio-at-risk ratios (PAR30) and write-offs. PAR30 is the proportion of an MFI’s loan portfolio that is overdue by at least 30 days, and write-offs are loans or portions of loans that have remained unpaid long enough that they have been removed from the MFI’s loan portfolio and accounted for as losses.
To measure geographic diversification, the authors use a combination of an MFI’s market focus (rural versus urban) and the number of branches it operates. Although the distance between branches may vary, “to us it is not only the geographic distance per se that matters. The mere fact that a bank has branches, whether in the same city/region or different cities/regions, increases the complexity of the bank.”
Based on their analysis, the authors identify a positive relationship between MFIs’ credit risk and geographic diversification. Specifically, the authors observe that the more an MFI geographically diversifies, the more susceptible it is to non-performing loans, resulting in a higher rate of write-offs and a need for increased loan-loss provisions. Meanwhile, the authors acknowledge that the study is limited to risk, and an analysis considering risk versus returns could indicate that geographic diversification has a positive effect on overall MFI performance.
By Jolene Khor, Research Associate
Sources and Additional Resources
“Geographic Diversification and Credit Risk in Microfinance”
https://www.researchgate.net/publication/336539379_Geographic_diversification_and_credit_risk_in_microfinance
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