Active risk management and loan contract terms: Evidence from rated microfinance institutions

The aim of this article is to test the relationship among organizational architecture, joint liabilities contracts, and loan conditions. Based on a sample of 135 MFIs rated between 2003 and 2008, the study shows that solidarity lending and a decentralized credit decision have no significant influence on loan conditions. Being a village bank lender is significantly associated with higher interest rates charged, higher outreach, lower depth of outreach, and higher transaction costs. Results seem to highlight the existence of a trade-off between outreach and the average loan size per borrower when MFIs decentralize credit decisions or establish joint liability contracts.

► The relationship between credit risk management devices and loan contract terms is studied.
► Credit decision decentralization and solidarity lending do not modify loan contract terms.
► Being a village bank lender is significantly associated with loan contract terms.
► There is a trade-off between outreach and the average loan size when MFIs set-up credit risk management devices.