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Does Competition in the Microfinance Industry Necessarily Mean Over-borrowing?

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  • Lahkar, Ratul
  • Pingali, Viswanath
  • Sadhu, Santadarshan

Abstract

In this paper we test the hypothesis of whether the presence of increasing number of microfinance institutions leads to over-borrowing. Some recent theoretical literature suggests that, in a joint liability setting, borrowers are more likely to borrow from multiple sources – without increasing their loan size – in order to better manage their risk due to partner default. Here, we test this hypothesis by utilizing a unique primary dataset generated through comprehensive surveys conducted in eight districts of Andhra Pradesh. Results suggest that over-borrowing and multiple loans are not necessarily synonymous. More broadly, as the number of credit agencies in a village increases, the average loan burden of villagers need not increase. Furthermore, there is an evidence of substitution from informal sources of credit to formal ones. Such substitution is greater with addition of microfinance institutions than with the addition of other formal lending agencies. Finally, we also find that the joint liability setup ensures that individuals at a greater risk of non-repayment are discouraged from obtaining MFI loans.

Suggested Citation

  • 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.
  • Handle: RePEc:iim:iimawp:11462
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    File URL: https://www.iima.ac.in/sites/default/files/rnpfiles/19931083332012-12-01.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. McIntosh, Craig & Wydick, Bruce, 2005. "Competition and microfinance," Journal of Development Economics, Elsevier, vol. 78(2), pages 271-298, December.
    3. 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.
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    Cited by:

    1. Lahkar, Ratul & Pingali, Viswanath, 2016. "Expansion and welfare in microfinance: A screening model," Economic Modelling, Elsevier, vol. 53(C), pages 1-7.
    2. Chichaibelu, Bezawit Beyene & Waibel, Hermann, 2017. "Borrowing from “Pui” to Pay “Pom”: Multiple Borrowing and Over-Indebtedness in Rural Thailand," World Development, Elsevier, vol. 98(C), pages 338-350.

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