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Microfinance and Moneylenders: Long-run Effects of MFIs on Informal Credit Market in Bangladesh

Author

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  • Berg, Claudia
  • Emran, Shahe
  • Shilpi, Forhad

Abstract

Using two surveys from Bangladesh, this paper provides evidence on the effects of microfinance competition on village moneylender interest rates and households’ dependence on informal credit. The views among practitioners diverge sharply: proponents claim that MFI competition reduces both the moneylender interest rate and households’ reliance on informal credit, while critics argue the opposite. Taking advantage of recent econometric approaches that address selection on unobservables without imposing standard exclusion restrictions, we find that the MFI competition does not reduce moneylender interest rates, thus partially repudiating the proponents. The effects are heterogeneous; there is no perceptible effect at low levels of MFI coverage, but when MFI coverage is high enough, the moneylender interest rate increases significantly. In contrast, households’ dependence on informal credit tends to go down after becoming MFI member, which contradicts part of the critic’s argument. The evidence is consistent with a model where either MFIs or moneylenders engage in cream skimming, and fixed costs are important in informal lending.

Suggested Citation

  • Berg, Claudia & Emran, Shahe & Shilpi, Forhad, 2015. "Microfinance and Moneylenders: Long-run Effects of MFIs on Informal Credit Market in Bangladesh," MPRA Paper 67395, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:67395
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Demont, Timothée, 2016. "Microfinance spillovers: A model of competition in informal credit markets with an application to Indian villages," European Economic Review, Elsevier, vol. 89(C), pages 21-41.
    2. Islam, Asadul & Nguyen, Chau & Smyth, Russell, 2015. "Does microfinance change informal lending in village economies? Evidence from Bangladesh," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 141-156.
    3. repec:eee:ecmode:v:69:y:2018:i:c:p:281-290 is not listed on IDEAS
    4. Bakshi, Rejaul & Mallick, Debdulal & Ulubaşoğlu, Mehmet, 2017. "Social capital as a coping mechanism for seasonal deprivation: The case of the Monga in Bangladesh," MPRA Paper 86587, University Library of Munich, Germany, revised 2018.
    5. Mookherjee, D. & Motta, A., 2016. "A theory of interactions between MFIs and informal lenders," Journal of Development Economics, Elsevier, vol. 121(C), pages 191-200.

    More about this item

    Keywords

    Microfinance; Moneylenders; Microcredit; Interest Rates; Informal Borrowing; Long-run Effects; Bangladesh; Identification through Heteroskedasticity;

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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