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Entry of Profit-Motivated Microfinance Institutions and Borrower Welfare

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  • Lahkar, Ratul
  • Pingali, Viswanath

Abstract

In this paper, we model welfare implications of entry of commercial microfinance institutions (MFIs). We initially characterize equilibrium with a sole fund-constrained benevolent credit institution followed by equilibrium with only profit-motivated MFIs. We show that entry of such MFIs can lead to an increase in interest and default and a decline in screening. However, it can still represent a Pareto improvement since: all agents previously denied credit can obtain loans, and existing clients have the option of seeking loans from MFIs. Finally, we model multiple group formation as an equilibrium mechanism, which allows more efficient risk diversification.

Suggested Citation

  • Lahkar, Ratul & Pingali, Viswanath, 2012. "Entry of Profit-Motivated Microfinance Institutions and Borrower Welfare," IIMA Working Papers WP2012-09-04, Indian Institute of Management Ahmedabad, Research and Publication Department.
    • Handle: RePEc:iim:iimawp:11455
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    File URL: https://www.iima.ac.in/sites/default/files/rnpfiles/1409846282012-09-04.pdf
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    References listed on IDEAS

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    1. Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-631, July.
    2. Robert Marquez, 2002. "Competition, Adverse Selection, and Information Dispersion in the Banking Industry," The Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 901-926.
    3. McIntosh, Craig & Wydick, Bruce, 2005. "Competition and microfinance," Journal of Development Economics, Elsevier, vol. 78(2), pages 271-298, December.
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    Cited by:

    1. Lahkar, Ratul & Pingali, Viswanath & Sadhu, Santadarshan, 2012. "Does Competition in the Microfinance Industry Necessarily Mean Over-borrowing?," IIMA Working Papers WP2012-12-01, Indian Institute of Management Ahmedabad, Research and Publication Department.

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