Discrimination by Microcredit Officers: Theory and Evidence on Disability in Uganda

This paper studies the relationship between an MFI and its credit officers when the latter are biased against a subgroup of the clientele. It aims to examine incentives as a way to eliminate discrimination.

Using survey data from Uganda, the paper analyzes the central role played by credit officers and scrutinizes mechanisms by which their prejudices may intervene in loan allocation. It provides evidence that credit officers are more biased against disabled borrowers than other employees. Incentive schemes may help align the credit officer’s behavior with the MFI’s goal. These schemes, however, are expensive, and MFI’s budget limited. Given these circumstances, even a non-discriminating, welfare-maximizing MFI may prefer paying a smaller incentivizing compensation, and letting its credit officer discriminate to some extent. The paper states that:

• Designing adequate incentives is delicate;
• Governance issues are more complex in socially-oriented organizations than in profit-oriented ones;
• Anti-discrimination measures might paradoxically make the MFI deviate from its mission.

The study findings have implications for future investigations aimed at gauging the amplitude of on-field discriminatory practices and exploring applicability of tools aligned with the MFIs’ social mission.