The Role of Local Depositors in Controlling Expenses in Small-Scale Financial Intermediation: An Empirical Analysis

Using data on Irish loan funds, a nineteenth-century quasi-bank system, we explore how the capital structure affects managerial agency to impact non-interest expenses. These organizations had no equity-holders and were financed by deposits and 'capital', comprising donations and accumulated profits, creating problems of managerial moral hazard. Higher net income (before non-interest expenses) is associated with higher salaries and other non-interest expenses. More surprisingly, higher 'capital'-deposit ratios led to higher expenses even after controlling for net income. While this institution is unique, the findings suggest that depositors could assist in controlling expenses in microfinance organizations. Copyright (c) The London School of Economics and Political Science 2007.