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Agent-based mapping of credit risk for sustainable microfinance.

PLoS ONE. 2015;10(5):e0126447 DOI 10.1371/journal.pone.0126447

 

Journal Homepage

Journal Title: PLoS ONE

ISSN: 1932-6203 (Online)

Publisher: Public Library of Science (PLoS)

LCC Subject Category: Medicine | Science

Country of publisher: United States

Language of fulltext: English

Full-text formats available: PDF, HTML, XML

 

AUTHORS


Joung-Hun Lee

Marko Jusup

Boris Podobnik

Yoh Iwasa

EDITORIAL INFORMATION

Peer review

Editorial Board

Instructions for authors

Time From Submission to Publication: 24 weeks

 

Abstract | Full Text

By drawing analogies with independent research areas, we propose an unorthodox framework for mapping microfinance credit risk--a major obstacle to the sustainability of lenders outreaching to the poor. Specifically, using the elements of network theory, we constructed an agent-based model that obeys the stylized rules of microfinance industry. We found that in a deteriorating economic environment confounded with adverse selection, a form of latent moral hazard may cause a regime shift from a high to a low loan payment probability. An after-the-fact recovery, when possible, required the economic environment to improve beyond that which led to the shift in the first place. These findings suggest a small set of measurable quantities for mapping microfinance credit risk and, consequently, for balancing the requirements to reasonably price loans and to operate on a fully self-financed basis. We illustrate how the proposed mapping works using a 10-year monthly data set from one of the best-known microfinance representatives, Grameen Bank in Bangladesh. Finally, we discuss an entirely new perspective for managing microfinance credit risk based on enticing spontaneous cooperation by building social capital.