Borrower Runs

This paper describes the effect of borrower runs in microfinance. It suggests that microfinance lenders reduce these risks by adopting different lending policies.The paper presents a model for achieving the long-term sustainability of microfinance institutions (MFI) and strategies to reduce the risks of borrower runs. The model explains:

• The probability of the borrower repaying the loan;
• The role of loans and subsidies during borrower defaults;
• The way forward for the MFI for achieving long-term sustainability.

The proposition 1 in the paper analysis of the repayment activity of the borrowers -concludes that MFIs are potentially prone to borrower runs.Exploring the effect of different subsidy policies on an MFI's susceptibility to borrower runs, the paper highlights that an MFI that is not worried about borrower runs will adopt policies that do not support long term sustainability, such as:

• Charging an above cost rate of interest on its first loan;
• Delivering all its donor funds and profits from the first loan as subsidy for its third loan.

Propositions 2 and 3 in the paper imply that an MFI sufficiently concerned about borrower runs will respond by pursuing long-term sustainability.

The paper concludes with a brief discussion of three other ways in which borrower runs may impact micro-financing practices.