Franchising Microfinance

This paper advocates franchising to deliver cost efficiencies and deal with competition in microfinance. The paper explores a model of credit provision that uses information available within the local population. It states that locally informed individuals or local capitalists possess relevant information about borrowers that they can use to monitor and screen borrowers. They may also possess collateral that they can use to get loans from formal financial intermediaries for on-lending to low-income borrowers. Local capitalists, however, find it difficult to prevent borrowers from defaulting. Borrowers are likely to default because they have access to multiple credit sources. The paper explores whether formation of a coalition by local capitalists would limit borrowers opportunity for multiple defaults and facilitate on-lending. Results indicate that:

• Monopoly moneylenders with superior enforcement technology can out-compete the local capitalist coalition;
• Local capitalist coalitions can, however, offer credible completion to the monopoly moneylender if they are made cost-effective;
• Direct subsidies, standardization, economies of scale and implementation of best practices help to make the local capitalist coalition cost-effective.

The paper states that franchising helps deliver cost-efficiencies and opportunities for local capitalists to form a coalition.