Provisioning over the business cycle: Some insights from the microfinance industry

Hélyoth T.S. Hessou*, Robert Lensink, Issouf Soumaré, Hubert Tchakoute Tchuigoua

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

This paper investigates the drivers of provisioning in MFIs and their provisioning behaviour over the business cycle. Based on an international sample of MFIs extracted from the MIX database over the 2001–2014 period, we uncover a negative relationship between MFIs' provisioning and the business cycle. Our finding corroborates the fact that MFIs do not build their loan loss provisions (LLP) during economic booms when profit and earnings are high. Since they provision more during downturns, they are more likely to suffer from unexpected losses and experience failure. This is in sharp contrast with the current Basel III countercyclical buffer requirement suggesting that financial institutions, especially banks, should build sufficient buffer in booms so that they can avoid costly capital adjustment when the economy contracts. Deeper analyses suggest however that this behaviour mainly concerns profit-oriented and deposit-taking/regulated MFIs, with business model and target close to conventional banking. This suggests that bank-like and regulated MFIs' loan loss provisions follow similar behavioral patterns to those of the conventional banking sector during the boom-and-bust cycles.

Original languageEnglish
Article number101825
JournalInternational Review of Financial Analysis
Volume77
DOIs
Publication statusE-pub ahead of print - 24 Jun 2021

Keywords

  • Business cycle
  • Credit cycle
  • Loan loss provisions
  • MFI
  • Microfinance

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