“Rational herding towards the poor. Evidence from Location Decisions of Microfinance Institutions within Pakistan”: that is the title of the article published by Jérôme Monne, an Audencia PhD student, and two professors, Céline Louche and Christophe Villa, in the prestigious journal World Development.
In fact, this article is the first chapter of Jérôme Monne’s PhD thesis that analyses the question of the difficulty for financial institutions of reaching the vulnerable customers that are often less well served. If the first chapter of the thesis offers a focus on the supply side of this problematic, the second and the third chapters will provide insights from the demand point of view. Indeed, an oft-neglected explanation of the difficulty for financial institutions to reach the vulnerable is that the latter erect psychological barriers that keep them away from eventual benefits. Jérôme explains the main results: “Analysing the geographical location of almost all the microfinance institutions (MFIs) within Pakistan, this particular paper gives further evidence that microfinance activities do not reach the poorest rural areas. Especially, we explore how this result is driven by the uncertainty faced by MFIs in their location decision i.e. they can hardly predict accurately whether or not they will perform financially. Furthermore, we find that MFIs are spatially clustered and identify three main reasons for this: common attraction factors i.e. the characteristics of one area place fits to the preferences of all MFIs so that they are all located in the same areas; payoff externalities to be collocated; and herd behaviour, i.e. MFIs follows one another. Most importantly, we find that a significant part of this herding process is rational, i.e. early locations of MFIs convey information used by later ones such that it reverses or neutralizes the negative impact of uncertainty resulting then in more locations in needier areas. Since it allows them to be located in poorer areas, MFIs improve the achievement of their social goal. This latter result is rather good news for those who reckon that a better access to financial services enhances economic growth and fosters poverty alleviation. Rational herding moderates the weakness of the financial services penetration in the poorest rural areas.”
For this particular study, the set of data at disposal comes from the mapping of microfinance activities in Pakistan made available by the Pakistan Microfinance Network (PMN) and the Pakistan Poverty Alleviation Funds (PPAF). The map allows a tracking of the branch location of 26 microfinance institutions (MFIs) until 2011, which worked with more than 90% of the borrowers served by the microfinance industry in Pakistan.