Adverse selections and microfinance in rural Africa: signalling through environmental services
The ability of microfinance institutions to identify sound and creditworthy clients in the area of agriculture in developing countries is difficult. The rural poor usually portray their farming activities as successful, even though this may not be the case. This gives rise to issues of adverse selection and loan default. Can certified environmental services (i.e. carbon credits) in rural sub-Saharan Africa provide adequate signalling for project success? This paper applies the standard game theory approach — similar to that set forth in previous publications — to adverse selection in developing countries in connection with certified environmental services. The results suggest that in a separating equilibrium, borrowers with certification (carbon credits) send a positive signal regarding the actual state of their farming activities which may ease adverse selection problems.Armendariz, B. and Morduch, J. (2005) The Economics of Microfinance, 2nd edn, Cambridge, MA: MIT Press.
Basu, A., Blavy, R. and Yulek, M. (2004) Microfinance in Africa: Experience and Lessons from Selected African Countries, IMF Working Paper 04/174, pp. 1-23, Washington, DC: IMF.
Batabyal, A. and Beladi, H. (2010) ‘A model of microfinance with adverse selection, loan default, and self-financing’, Agricultural Finance Review 70: 55-65. <http://dx.doi.org/10.1108/00021461011042639≯
Benjamin, O. (2012a) ‘Improving credit allocation to sustainable agriculture in sub-Saharan Africa: review of bio-based economy benefits’, OIDA International Journal of Sustainable Development 4: 15-24.
Benjamin, O. (2012b) ‘Financial lending and investment in sustainable small-scale agribusiness in sub-Saharan Africa: a review of carbon sequestration and welfare benefits’, African Journal of Science, Technology, Innovation and Development 4: 109-29.
Dixon, R., Ritchie, J. and Siwale, J. (2007) ‘Loan officers and loan “delinquency” in microfinance: a Zambian case’, Accounting Forum 31: 47-71. <http://dx.doi.org/10.1016/j.accfor.2006.11.005≯
Havemann, T. (2011) Financing mitigation in smallholder agricultural systems: issues and opportunities', in E. Wollenberg, A. Nihart, M-L. Tapio-Biström and M. Grieg-Gran (eds.), Climate Change Mitigation and Agriculture, London: Earthscan.
Jindal, R., Swallow, B. and Kerr, J. (2008) ‘Forestry-based carbon sequestration projects in Africa: potential benefits and challenges’, Natural Resources Forum32: 116-30. <http://dx.doi.org/10.1111/j.1477-8947.2008.00176.x≯
Mohapatra, A. (2007) ‘Stimulating small business for sustainable livelihoods of poor through urban micro-finance’, Microfinance Focus 2: 9-14.
Pandey, V. (2007) ‘Urban microfinance: efforts towards a lasting impact’, Microfinance Focus 2: 1-9.
Patel, A. (2010) Agricultural Credit by Commercial Banks in India: Need for Creating Enabling Environment [online], <www.microfinancegateway.org/gm/document-1.9.49819/Agricultural%20Credit.pdfx≯ [accessed 27April 2012]. www.microfinancegateway.org/gm/document-1.9.49819/Agricultural%20Credit.pdfx
Pederson, G. (2003) ‘Rural finance institutions, markets and policies in Africa’, paper presented at the Pre-IAAE Conference on African Agricultural Economics, Bloemfontein, 13-14 August 2003, pp. 1-25.
Sacerdoti, E. (2005) Access to Bank Credit in Sub-Saharan Africa: Key Issues and Reform Strategies, IMF Working Paper 5/166, pp. 1-38, Washington, DC: IMF.
Simtowe, F., Zeller, M., Phiri, A. and Mburu, J. (2007) ‘Long-run determinants of moral hazard in microfinance: a study group lending program from Malawi using panel data’, Quarterly Journal of International Agriculture 46: 69-84.
Ssewamala, F., Sperber, E., Zimmerman, J. and Karimli, L. (2010) ‘The potential of asset-based development strategies for poverty alleviation in sub-Saharan Africa’, International Journal of Social Welfare 19: 433-43. <http://dx.doi.org/10.1111/j.1468-2397.2010.00738.xx≯
World Bank (2011) ‘First African emission reductions purchase agreement for soil carbon signed in The Hague’ [online] <http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22753334~pagePK:34370~piPK:34424~theSitePK:4607,00.htmlx≯ [accessed 27 April 2012]. http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22753334~pagePK:34370~piPK:34424~theSitePK:4607,00.htmlx
Armendariz, B. and Morduch, J. (2005) The Economics of Microfinance, 2nd edn, Cambridge, MA: MIT Press.
Basu, A., Blavy, R. and Yulek, M. (2004) Microfinance in Africa: Experience and Lessons from Selected African Countries, IMF Working Paper 04/174, pp. 1-23, Washington, DC: IMF.
Batabyal, A. and Beladi, H. (2010) ‘A model of microfinance with adverse selection, loan default, and self-financing’, Agricultural Finance Review 70: 55-65. <http://dx.doi.org/10.1108/00021461011042639≯
Benjamin, O. (2012a) ‘Improving credit allocation to sustainable agriculture in sub-Saharan Africa: review of bio-based economy benefits’, OIDA International Journal of Sustainable Development 4: 15-24.
Benjamin, O. (2012b) ‘Financial lending and investment in sustainable small-scale agribusiness in sub-Saharan Africa: a review of carbon sequestration and welfare benefits’, African Journal of Science, Technology, Innovation and Development 4: 109-29.
Dixon, R., Ritchie, J. and Siwale, J. (2007) ‘Loan officers and loan “delinquency” in microfinance: a Zambian case’, Accounting Forum 31: 47-71. <http://dx.doi.org/10.1016/j.accfor.2006.11.005≯
Havemann, T. (2011) Financing mitigation in smallholder agricultural systems: issues and opportunities', in E. Wollenberg, A. Nihart, M-L. Tapio-Biström and M. Grieg-Gran (eds.), Climate Change Mitigation and Agriculture, London: Earthscan.
Jindal, R., Swallow, B. and Kerr, J. (2008) ‘Forestry-based carbon sequestration projects in Africa: potential benefits and challenges’, Natural Resources Forum32: 116-30. <http://dx.doi.org/10.1111/j.1477-8947.2008.00176.x≯
Mohapatra, A. (2007) ‘Stimulating small business for sustainable livelihoods of poor through urban micro-finance’, Microfinance Focus 2: 9-14.
Pandey, V. (2007) ‘Urban microfinance: efforts towards a lasting impact’, Microfinance Focus 2: 1-9.
Patel, A. (2010) Agricultural Credit by Commercial Banks in India: Need for Creating Enabling Environment [online], <www.microfinancegateway.org/gm/document-1.9.49819/Agricultural%20Credit.pdfx≯ [accessed 27April 2012]. www.microfinancegateway.org/gm/document-1.9.49819/Agricultural%20Credit.pdfx
Pederson, G. (2003) ‘Rural finance institutions, markets and policies in Africa’, paper presented at the Pre-IAAE Conference on African Agricultural Economics, Bloemfontein, 13-14 August 2003, pp. 1-25.
Sacerdoti, E. (2005) Access to Bank Credit in Sub-Saharan Africa: Key Issues and Reform Strategies, IMF Working Paper 5/166, pp. 1-38, Washington, DC: IMF.
Simtowe, F., Zeller, M., Phiri, A. and Mburu, J. (2007) ‘Long-run determinants of moral hazard in microfinance: a study group lending program from Malawi using panel data’, Quarterly Journal of International Agriculture 46: 69-84.
Ssewamala, F., Sperber, E., Zimmerman, J. and Karimli, L. (2010) ‘The potential of asset-based development strategies for poverty alleviation in sub-Saharan Africa’, International Journal of Social Welfare 19: 433-43. <http://dx.doi.org/10.1111/j.1468-2397.2010.00738.xx≯
World Bank (2011) ‘First African emission reductions purchase agreement for soil carbon signed in The Hague’ [online] <http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22753334~pagePK:34370~piPK:34424~theSitePK:4607,00.htmlx≯ [accessed 27 April 2012]. http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22753334~pagePK:34370~piPK:34424~theSitePK:4607,00.htmlx
Armendariz, B. and Morduch, J. (2005) The Economics of Microfinance, 2nd edn, Cambridge, MA: MIT Press.
Basu, A., Blavy, R. and Yulek, M. (2004) Microfinance in Africa: Experience and Lessons from Selected African Countries, IMF Working Paper 04/174, pp. 1-23, Washington, DC: IMF.
Batabyal, A. and Beladi, H. (2010) ‘A model of microfinance with adverse selection, loan default, and self-financing’, Agricultural Finance Review 70: 55-65. <http://dx.doi.org/10.1108/00021461011042639≯
Benjamin, O. (2012a) ‘Improving credit allocation to sustainable agriculture in sub-Saharan Africa: review of bio-based economy benefits’, OIDA International Journal of Sustainable Development 4: 15-24.
Benjamin, O. (2012b) ‘Financial lending and investment in sustainable small-scale agribusiness in sub-Saharan Africa: a review of carbon sequestration and welfare benefits’, African Journal of Science, Technology, Innovation and Development 4: 109-29.
Dixon, R., Ritchie, J. and Siwale, J. (2007) ‘Loan officers and loan “delinquency” in microfinance: a Zambian case’, Accounting Forum 31: 47-71. <http://dx.doi.org/10.1016/j.accfor.2006.11.005≯
Havemann, T. (2011) Financing mitigation in smallholder agricultural systems: issues and opportunities', in E. Wollenberg, A. Nihart, M-L. Tapio-Biström and M. Grieg-Gran (eds.), Climate Change Mitigation and Agriculture, London: Earthscan.
Jindal, R., Swallow, B. and Kerr, J. (2008) ‘Forestry-based carbon sequestration projects in Africa: potential benefits and challenges’, Natural Resources Forum32: 116-30. <http://dx.doi.org/10.1111/j.1477-8947.2008.00176.x≯
Mohapatra, A. (2007) ‘Stimulating small business for sustainable livelihoods of poor through urban micro-finance’, Microfinance Focus 2: 9-14.
Pandey, V. (2007) ‘Urban microfinance: efforts towards a lasting impact’, Microfinance Focus 2: 1-9.
Patel, A. (2010) Agricultural Credit by Commercial Banks in India: Need for Creating Enabling Environment [online], <www.microfinancegateway.org/gm/document-1.9.49819/Agricultural%20Credit.pdfx≯ [accessed 27April 2012]. www.microfinancegateway.org/gm/document-1.9.49819/Agricultural%20Credit.pdfx
Pederson, G. (2003) ‘Rural finance institutions, markets and policies in Africa’, paper presented at the Pre-IAAE Conference on African Agricultural Economics, Bloemfontein, 13-14 August 2003, pp. 1-25.
Sacerdoti, E. (2005) Access to Bank Credit in Sub-Saharan Africa: Key Issues and Reform Strategies, IMF Working Paper 5/166, pp. 1-38, Washington, DC: IMF.
Simtowe, F., Zeller, M., Phiri, A. and Mburu, J. (2007) ‘Long-run determinants of moral hazard in microfinance: a study group lending program from Malawi using panel data’, Quarterly Journal of International Agriculture 46: 69-84.
Ssewamala, F., Sperber, E., Zimmerman, J. and Karimli, L. (2010) ‘The potential of asset-based development strategies for poverty alleviation in sub-Saharan Africa’, International Journal of Social Welfare 19: 433-43. <http://dx.doi.org/10.1111/j.1468-2397.2010.00738.xx≯
World Bank (2011) ‘First African emission reductions purchase agreement for soil carbon signed in The Hague’ [online] <http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22753334~pagePK:34370~piPK:34424~theSitePK:4607,00.htmlx≯ [accessed 27 April 2012]. http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22753334~pagePK:34370~piPK:34424~theSitePK:4607,00.htmlx
Armendariz, B. and Morduch, J. (2005) The Economics of Microfinance, 2nd edn, Cambridge, MA: MIT Press.
Basu, A., Blavy, R. and Yulek, M. (2004) Microfinance in Africa: Experience and Lessons from Selected African Countries, IMF Working Paper 04/174, pp. 1-23, Washington, DC: IMF.
Batabyal, A. and Beladi, H. (2010) ‘A model of microfinance with adverse selection, loan default, and self-financing’, Agricultural Finance Review 70: 55-65. <http://dx.doi.org/10.1108/00021461011042639≯
Benjamin, O. (2012a) ‘Improving credit allocation to sustainable agriculture in sub-Saharan Africa: review of bio-based economy benefits’, OIDA International Journal of Sustainable Development 4: 15-24.
Benjamin, O. (2012b) ‘Financial lending and investment in sustainable small-scale agribusiness in sub-Saharan Africa: a review of carbon sequestration and welfare benefits’, African Journal of Science, Technology, Innovation and Development 4: 109-29.
Dixon, R., Ritchie, J. and Siwale, J. (2007) ‘Loan officers and loan “delinquency” in microfinance: a Zambian case’, Accounting Forum 31: 47-71. <http://dx.doi.org/10.1016/j.accfor.2006.11.005≯
Havemann, T. (2011) Financing mitigation in smallholder agricultural systems: issues and opportunities', in E. Wollenberg, A. Nihart, M-L. Tapio-Biström and M. Grieg-Gran (eds.), Climate Change Mitigation and Agriculture, London: Earthscan.
Jindal, R., Swallow, B. and Kerr, J. (2008) ‘Forestry-based carbon sequestration projects in Africa: potential benefits and challenges’, Natural Resources Forum32: 116-30. <http://dx.doi.org/10.1111/j.1477-8947.2008.00176.x≯
Mohapatra, A. (2007) ‘Stimulating small business for sustainable livelihoods of poor through urban micro-finance’, Microfinance Focus 2: 9-14.
Pandey, V. (2007) ‘Urban microfinance: efforts towards a lasting impact’, Microfinance Focus 2: 1-9.
Patel, A. (2010) Agricultural Credit by Commercial Banks in India: Need for Creating Enabling Environment [online], <www.microfinancegateway.org/gm/document-1.9.49819/Agricultural%20Credit.pdfx≯ [accessed 27April 2012]. www.microfinancegateway.org/gm/document-1.9.49819/Agricultural%20Credit.pdfx
Pederson, G. (2003) ‘Rural finance institutions, markets and policies in Africa’, paper presented at the Pre-IAAE Conference on African Agricultural Economics, Bloemfontein, 13-14 August 2003, pp. 1-25.
Sacerdoti, E. (2005) Access to Bank Credit in Sub-Saharan Africa: Key Issues and Reform Strategies, IMF Working Paper 5/166, pp. 1-38, Washington, DC: IMF.
Simtowe, F., Zeller, M., Phiri, A. and Mburu, J. (2007) ‘Long-run determinants of moral hazard in microfinance: a study group lending program from Malawi using panel data’, Quarterly Journal of International Agriculture 46: 69-84.
Ssewamala, F., Sperber, E., Zimmerman, J. and Karimli, L. (2010) ‘The potential of asset-based development strategies for poverty alleviation in sub-Saharan Africa’, International Journal of Social Welfare 19: 433-43. <http://dx.doi.org/10.1111/j.1468-2397.2010.00738.xx≯
World Bank (2011) ‘First African emission reductions purchase agreement for soil carbon signed in The Hague’ [online] <http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22753334~pagePK:34370~piPK:34424~theSitePK:4607,00.htmlx≯ [accessed 27 April 2012]. http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22753334~pagePK:34370~piPK:34424~theSitePK:4607,00.htmlx
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