Creating Incentives for Micro-Credit Agents to Lend to the Poor

This paper analyzes how non-profit microfinance institutions (MFIs) can set incentives for their credit agents to select very poor borrowers, and to allow the MFI to reach as many of them as possible, while achieving financial sustainability.

The paper states that:

• There is mission drift among MFIs moving up the poverty scale;
• There is a need to introduce incentive payment schemes that reward and guide the agents towards meeting the MFI's specific objectives.

The paper aims to show that:

• In contexts where less poor borrowers are extensively present, it is beneficial to lend them part of the non-profit MFI's portfolio in order to cross-subsidize the very poor;
• This requires introducing a system of incentives for credit agents that include random audits to verify the proportion of very poor borrowers in the agentrtfolio;
• Lack of information on the borrower's ability and agent's effort, together with positive correlation between repayment and wealth, would require a pro-poor MFI to offer wage schemes that are non-increasing in the repayment rate.

The paper concludes that:

• By introducing poverty audit mechanisms of the agent's clients, the MFI can pursue a cross-subsidization strategy to maximize its poverty outreach;
• The use of low-cost assessment indicators would help reduce the costs of implementing random audits on the proportion of very poor clients of each particular agent in a pro-poor MFI.