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Regulation of Microfinance Institutions in Developing countries: an incentives theory approach

We analyze the optimal policy of regulation of microfinance institutions in developing countries, where investment funds are insured by the government and customer deposits. We used a mixed model, combining adverse selection and moral hazard to characterize a class of optimal incentive schemes applied in presence of government funds and in non-government funded. We also analyse the effects of prudential regulation of deposits on the profitability of MFI and social welfare, and we compare prudential and non-prudential regulation. The incentive scheme that we propose can be regarded as a « smart subsidy » mechanism that contributes to the economic and social development.
WP CRESE 2016-3
JEL : G10 ; G21 ; G28
Microfinance, Adverse selection, Moral hazard, Incentive mechanisms, Regulation, Smart subsidy