Environmental Shocks and Sustainability in Microfinance: Evidence from the Great Famine of Ireland

Goodspeed, Tyler Beck

doi:10.1093/wber/lhw043

Publication: Environmental Shocks and Sustainability in Microfinance: Evidence from the Great Famine of Ireland

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Date

2018-06

Published

2018-06

Author(s)

Goodspeed, Tyler Beck

Abstract

I study the effects of a major environmental shock on microfinance lending by analyzing the Irish Loan Funds during the Great Famine of Ireland. I find that funds in districts worse affected by blight experienced higher failure rates and greater credit retrenchment and flight-to-quality than funds in less affected districts. Though greater leverage was generally associated with a higher predicted probability of institutional survival, the reverse was true where blight infection was more severe, and though more profitable funds were generally no more likely to survive, higher pre-famine margins were positive predictors of institutional survival where blight infection was worse. Results further indicate that the primary mechanisms by which pre-famine balance sheet metrics influenced survival probabilities were differential balance sheet contraction and flight-to-quality during the famine. The results of this study, therefore, suggest that optimal lending models in ordinary circumstances may render microfinance institutions (MFIs) more vulnerable to tail-probability aggregate shocks, with higher leverage, lower paid staff, lower economic rents, and more extensive liabilities limiting the scope for credit retrenchment and flight-to-quality. Results further indicate that one cost of MFI resilience to adverse environmental change is substantially reduced outreach to borrowers of lower credit quality.

Citation

“Goodspeed, Tyler Beck. 2018. Environmental Shocks and Sustainability in Microfinance: Evidence from the Great Famine of Ireland. World Bank Economic Review. © Published by Oxford University Press on behalf of the World Bank. http://hdl.handle.net/10986/32785 License: CC BY-NC-ND 3.0 IGO.”