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Competition and wide outreach of Microfinance Institutions

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  • Hisako Kai

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    (Kobe University)

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    Abstract

    While the theoretical literature has found that intense competition leads to the poorest borrowers dropping out of the microfinance market, we do not possess sufficient research accumulated for empirical analysis in this field. This paper examines the empirical relationship between competition and wide outreach—which measures how poor-borrower microfinance institutions (MFIs) provide loans—and its accompanying effect, the impact of competition on financial self-sufficiency (FSS), using abundant financial data for socially-motivated MFIs between 2003 and 2006. We provide the first detailed econometric analysis in this regard focusing on socially-motivated MFIs in developing countries around the world. This paper finds that intense competition worsens the wide outreach, showing that the poorest borrowers are dropped from the microfinance lending portfolio. Moreover, the empirical result indicates that the adverse effect of competition on wide outreach declines as MFIs gain experience. Furthermore, this paper confirms that competition does not worsen financial self-sufficiency (FSS) and hence does not raise subsidy dependence.

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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 29 (2009)
    Issue (Month): 4 ()
    Pages: 2628-2639

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    Handle: RePEc:ebl:ecbull:eb-09-00528

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    Related research

    Keywords: Competition; Wide outreach; Microfinance Institutions; Poverty reduction;

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    References

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    1. McIntosh, Craig & Wydick, Bruce, 2005. "Competition and microfinance," Journal of Development Economics, Elsevier, Elsevier, vol. 78(2), pages 271-298, December.
    2. Valentina Hartarska & Denis Nadolnyak, 2007. "Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 39(10), pages 1207-1222.
    3. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, Elsevier, vol. 16(1), pages 155-155, May.
    4. Morduch, Jonathan, 2000. "The Microfinance Schism," World Development, Elsevier, Elsevier, vol. 28(4), pages 617-629, April.
    5. Hoff, Karla & Stiglitz, Joseph E., 1997. "Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market," Journal of Development Economics, Elsevier, Elsevier, vol. 52(2), pages 429-462, April.
    6. Conning, Jonathan, 1999. "Outreach, sustainability and leverage in monitored and peer-monitored lending," Journal of Development Economics, Elsevier, Elsevier, vol. 60(1), pages 51-77, October.
    7. Khandker, Shahidur R., 2003. "Microfinance and poverty - evidence using panel data from Bangladesh," Policy Research Working Paper Series 2945, The World Bank.
    8. Jonathan Conning & Sergio Navajas & Claudio Gonzalez-Vega, 2003. "Lending Technologies, Competition, and Consolidation in the Market for Microfinance in Bolivia," Economics Working Paper Archive at Hunter College, Hunter College Department of Economics 213, Hunter College Department of Economics.
    9. Cull, Robert & Demirguc-Kunt, Asli & Morduch, Jonathan, 2006. "Financial performance and outreach : a global analysis of leading microbanks," Policy Research Working Paper Series 3827, The World Bank.
    10. Craig McIntosh & Alain Janvry & Elisabeth Sadoulet, 2005. "How Rising Competition Among Microfinance Institutions Affects Incumbent Lenders," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(506), pages 987-1004, October.
    11. Morduch, Jonathan, 1999. "The role of subsidies in microfinance: evidence from the Grameen Bank," Journal of Development Economics, Elsevier, Elsevier, vol. 60(1), pages 229-248, October.
    12. Robert M. Townsend & Jacob Yaron, 2001. "The credit risk-contingency system of an Asian development bank," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q III, pages 31-48.
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    Cited by:
    1. Brishti Guha & Prabal Roy Chowdhury, 2012. "Borrower Targeting under Micro-finance Competition with Motivated MFIs," Working Papers, Singapore Management University, School of Economics 05-2012, Singapore Management University, School of Economics.
    2. Louis, Philippe & Seret, Alex & Baesens, Bart, 2013. "Financial Efficiency and Social Impact of Microfinance Institutions Using Self-Organizing Maps," World Development, Elsevier, Elsevier, vol. 46(C), pages 197-210.

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