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Journal of Microfinance / ESR Review

Abstract

Innovative credit enterprises, aiming to expand the frontier of the rural credit market, can attain financial sustainabihty and broadened social outreach if they embed financial operations in local institutions, such as social networks and prevailing rules. Only in this way can the "rules of the game" imposed by the credit enterprise gain the local legitimacy that is necessary to reduce transaction costs sufficiently. The nature of preexisting local institutional environments, therefore, has a profound effect on the performance of credit enterprises. Our analysis of a rural microcredit program in two neighboring villages in Nicaragua indicates that existing patron-client structures, conditioned by Sandinista agrarian reform and the harshness of agro-ecological conditions, had a negative effect on the local acceptance of strict repayment rules. This analysis suggests that the evaluation of credit enterprise performance should take into account differences in local institutional environments and that efforts should be made to fine-tune standard financial technology to more adverse institutional conditions. If not, the microfinance industry may tend to exclude more difficult and poorer rural areas.

Biography

John Bastiaensen is a lecturer of institutional development economics at the Institute of Development Policy and Management of the University of Antwerp, Belgium.; Ben D'Exelle is currently doing Ph.D. research at the University of Antwerp, Belgium.

Section

Articles

Journal Title

Journal of Microfinance

Issue and Volume

42096

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