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Competition, loan rates and information dispersion in microcredit markets

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Author Info

  • Guillermo Baquero

    (ESMT European School of Management and Technology)

  • Malika Hamadi

    (Luxembourg School of Finance (LSF))

  • Andréas Heinen

    (THEMA, Université de Cergy-Pontoise)

Abstract

We study the effects of competition on loan rates and portfolio-at-risk in microcredit markets using a new database from rating agencies, covering 379 microbanks located in 67 countries between 2002 and 2008. Our study reveals different competitive effects in nonprofit and for-profit microbanks. We find that for-profit microbanks charge significantly lower rates and exhibit improved portfolio-at-risk in less concentrated markets. In particular, the effect of concentration on loan rates is nearly three times the one reported in previous studies in banking. In contrast, nonprofit microbanks are relatively insensitive to changes in concentration. We control for interest rate ceilings, which very significantly reduce rates in for-profit microbanks. However, our study also uncovers a competitive interplay between for-profit and nonprofit microbanks. In particular, the PAR of nonprofit microbanks deteriorates when the proportion of profit-oriented microbanks increases. Finally, we find evidence consistent with dispersion of borrower-specific information among competing microbanks in the for-profit sector, even after controlling for the presence of credit registries.

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Bibliographic Info

Paper provided by ESMT European School of Management and Technology in its series ESMT Research Working Papers with number ESMT-12-02.

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Length: 57 pages
Date of creation: 16 Feb 2012
Date of revision:
Handle: RePEc:esm:wpaper:esmt-12-02

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Keywords: bank competition; microfinance; microcredit; microbank; loan rates; information dispersion; PAR; portfolio quality;

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References

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Cited by:
  1. Thiemo Fetzer & Maitreesh Ghatak & Jonathan de Quidt, 2012. "Market Structure and Borrower Welfare in Microfinance," STICERD - Economic Organisation and Public Policy Discussion Papers Series 40, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. repec:cge:warwcg:122 is not listed on IDEAS

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