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Micro-finance Competition: Motivated Micro-lenders, Double-dipping and Default

  • Brishti Guha

    ()

    (Department of Economics, Singapore Management University, 90 Stamford Road, Singapore 178903)

  • Prabal Roy Chowdhury

We develop a tractable model of competition among socially motivated MFIs, so that the objective functions of the MFIs put some weight on their own clients' utility. We nd that the equilibrium involves double-dipping, i.e. borrowers taking multiple loans from different MFIs, whenever the MFIs are relatively profit-oriented. Further, double-dipping necessarily leads to default and inefficiency, and moreover, borrowers who double-dip face relatively higher transactions costs and are actually worse off compared to those who do not. Interestingly, an increase in MFI competition can increase the extent of doubledipping and default. Further, the interest rates may go either way, with the interest rate likely to increase if the MFIs are very socially motivated.

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Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 01-2013.

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Length: 43 pages
Date of creation: Jan 2013
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:01-2013
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