Buffer capital in microfinance institutions

The objective of the study is to examine the drivers of the buffer capital held by microfinance institutions, with particular emphasis on competition and its asset side effects, specifically loan portfolio quality and lending approaches. We also investigate whether competition and its asset side effects depend on whether the microfinance institution collects deposits or not or whether the institution is better capitalized or not. Except for deposit-taking MFI subsample, findings provide supportive evidence for the competition's pricing and monitoring incentive effects. Loan portfolio quality and MFI size are negatively related to buffer capital. Moral hazard in microcredit markets is likely to affect equity levels held by microfinance institutions. At the lower quantile (undercapitalized MFIs), market concentration is associated with larger buffer capital. Findings are robust to alternative measures of buffer capital and competition.