Optimal strategies for the development of microfinance in Korea and the impact of microfinance

Yoon, Youngeun

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Description

Title

Optimal strategies for the development of microfinance in Korea and the impact of microfinance

Author(s)

Yoon, Youngeun

Issue Date

2010-06-29T00:59:53Z

Director of Research (if dissertation) or Advisor (if thesis)

Rashid, Salim

Doctoral Committee Chair(s)

Rashid, Salim

Committee Member(s)

• Baer, Werner W.
• Bera, Anil K.
• Hong, Seung-Hyun

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• microfinance
• Agent-based model (ABM)
• microcredit
• survival of microenterprises
• strategy for microfinance

Abstract

This paper mainly focuses on finding optimal strategies for the development of microfinance in Korea and on predicting the impact of microfinance in the future. First, this paper reviews and assesses the impact of microfinance in Korea. I suggested that recent phenomena of income polarization and credit rationing in the financial market are evidence that microfinance is needed in Korea. Although the Korean economy has made great strides, the difference in the income between the poor and the rich has gotten much greater. The foreign currency crisis in 1997 deepened income polarization and the impact is continuing. Banks choose to ration credit instead of increasing interest rate (when there was an excess demand for loans) which would lead adverse selection and moral hazards. The poor are in an inferior position when it comes to getting funds when credit ration happens because they cannot offer collateral and they need money urgently. This paper analyzes the factors which impact up on the survival of microenterprises using two econometric methods (the logit regression model and the Cox proportional hazard model). Attributes of microenterprises, such as organizational form, sex of the owner(s), income level of the owner(s), and types of business are chosen as independent variables which may have impact on the survival. The results from the econometric models indicate that more support should be provided when the income level of the owner(s) became less if we want to make more microenterprises survive. The direction of impact or the relative magnitudes of impact is not exactly the same between two econometric methods. Therefore, proper interpretation and fine tuning are needed in applying the results into the real microcredit world. Next, this paper outlines the impact of microfinance on the income level of the poor and the repayment ratio of microcredit. This task is carried out by a simulation which is an agent based model. The simulation of the agent based model shows that two different policy directions are needed to guarantee the success of microfinance. First, it is necessary to magnify positive impacts. There are at least two ways this can be done. You can increase the amount of microcredit to make it easier to start businesses and you can support an increase in the yield rate of return. Minimizing negative impacts is also important. This can be done by decreasing the interest rate charged by local money lenders and closely monitoring their behavior to see if they obey the usury law. Finally, I proposed several optimal strategies for the development of microfinance in the future. (1) Introducing and enforcing group lending, because group lending can solve two major problems in microfinance, adverse selection by assortative matching and moral hazard by monitoring group members’ transactions. (2) Letting MFIs (Microfinance Institutions) carry out both microsaving and microinsurance. (3) Establishing independent committees to mediate disputes regarding microcredit issues, which can solve commitment problem. (4) Expanding microfinance services by letting MFIs handle housing microfinance and loans for education and health care. (5) Encouraging social enterprise to help the poor overcome their state of poverty. In conclusion, appropriate social objectives and forward looking entrepreneurship when properly supported by MFIs can bring remarkable progress in social integration and help the poor overcome their state of poverty.

Graduation Semester

2010-05

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Copyright 2010 Youngeun Yoon

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