Loan Officer Rotation and Credit Access

In rural communities, banks normally have inadequate information about their clients and frequently find it difficult to enforce loan agreements. Borrowers, on their part, regularly lack sufficient collateral or credit ratings to secure loans from commercial banks. High transaction costs, adverse selection and moral hazard, coupled with small transaction sizes, limit the prospect for banks to operate efficiently and profitably in rural communities. Through numerous mechanisms and strategies, microfinance is changing the thinking of establishing banks in rural communities in developing countries by using approaches that employ easy access to loans and repayment. Microfinance offers minor loans through modest contracts between borrowers and microfinance institutions.

In the framework of microfinance, group/joint-liability lending is lauded and presented as a solution to borrowers’ credit access and monitoring challenges, especially when there is no adequate collateral. Inasmuch as the group liability lending has attracted a great deal of research concentration and attention, little has been done about the role of loan officer rotation in the framework of MFIs about credit access.

Presently, more individual based lending strategies are gaining relevance in the MFIs literature (Heikkilä, 2011), as the group/joint-liability is not free of borrowers’ challenges such as colluding and free riding as suggested by Gine et al., (2010). As the role of individual based lending approaches becomes popular among MFIs, so has the role of loan officers gained emphasis in dealing with borrowers. However, little has been done in this regard in relation to the role of loan officer rotation and credit access, especially in rural areas where information asymmetries are larger.

Previous studies on loan officers and credit access such as Uchida et al. (2012) shows that, loan officers are crucial in producing soft information about borrowers. Regular loan officer revenue and loan officer rotation results in fewer information productions whilst more information is produced when a borrower is assigned to one loan officer for a long period. Loan officers at small banks produce more soft information than their counterparts at big banks because they give more efforts in acquiring the needed information.

In a similar study on rotation, Hertzberg et al., (2010) had focused on the effect of rotation policy among agents, whereby regularly reallocating tasks to employees can help reduce communication challenges such as suppressing/concealing bad information in organizations. The role of loan officers in acquiring soft information from clients cannot be underestimated in the microfinance setting. However, results from rotation have been ambivalent and not conclusive as Hertzberg et al. (2010), Bhowal et al. (2013) and Uchida et al. (2012) share different experiences. We build on this knowledge by exploring how rotation of loan officers could influence credit access in urban and rural areas.

This study is intended to explore and to investigate such relationships between loan officers and credit access in urban and rural areas through rotation, and the possible consequences of rotation on borrowers in accessing credit. Specifically, this purpose could be achieved through the following: Firstly, by investigating how loan officer rotation affects credit access and secondly, to investigate whether loan officer rotation has similar effect on credit access in urban and rural areas where information asymmetries are larger.