Banks and Microbanks

We combine two datasets to examine whether the scale of an economy's banking system affects the profitability and outreach of microfinance institutions. We find evidence that competition matters. Greater bank penetration in the overall economy is associated with microbanks pushing toward poorer markets, as reflected in smaller average loans sizes and greater outreach to women. The evidence is particularly strong for microbanks that rely on commercial-funding, use traditional bilateral lending contracts (rather than group lending methods favored by microfinance NGOs), and take deposits. We consider plausible alternative explanations for the correlations, including relationships that run through the nature of the regulatory environment and the structure of the banking environment, but we fail to find strong support for these alternative hypotheses. The views are those of the authors and not necessarily those of the World Bank or its affiliate institutions. Morduch is grateful for funding from the Bill and Melinda Gates Foundation through the Financial Access Initiative. The Mix Market provided data through an agreement between the World Bank Research Department and the Consultative Group to Assist the Poor. Confidentiality of institution-level data has been maintained. We thank Isabelle Barres, Joao Fonseca, and Peter Wall of the Microfinance Information Exchange (MIX) for their substantial efforts in assembling both the adjusted data and the qualitative information on microfinance institutions for us. Mircea Trandafir provided expert data analysis; Varun Kshirsagar and Ippei Nishida provided additional assistance. All views and any errors are ours only.