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Competition and wide outreach of Microfinance Institutions

  • Hisako Kai

    ()

    (Kobe University)

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    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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    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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    1. Robert Cull & Asli Demirguç-Kunt & Jonathan Morduch, 2007. "Financial performance and outreach: a global analysis of leading microbanks," Economic Journal, Royal Economic Society, vol. 117(517), pages F107-F133, 02.
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    6. Valentina Hartarska & Denis Nadolnyak, 2007. "Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence," Applied Economics, Taylor & Francis Journals, vol. 39(10), pages 1207-1222.
    7. J. A. Hausman & W. E. Taylor, 1980. "Panel Data and Unobservable Individual Effects," Working papers 255, Massachusetts Institute of Technology (MIT), Department of Economics.
    8. Sergio Navajas & Jonathan Conning & Claudio Gonzalez-Vega, 2003. "Lending technologies, competition and consolidation in the market for microfinance in Bolivia," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(6), pages 747-770.
    9. Robert M. Townsend & Jacob Yaron, 2001. "The credit risk-contingency system of an Asian development bank," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 31-48.
    10. Morduch, Jonathan, 1999. "The role of subsidies in microfinance: evidence from the Grameen Bank," Journal of Development Economics, Elsevier, vol. 60(1), pages 229-248, October.
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    12. McIntosh, Craig & Wydick, Bruce, 2005. "Competition and microfinance," Journal of Development Economics, Elsevier, vol. 78(2), pages 271-298, December.
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