Competition, Loan Rates, and Information Dispersion in Nonprofit and For‐Profit Microcredit Markets

Abstract

We describe the competitive environment of microcredit markets globally and we study the effects of competition on loan rates of microfinance institutions (MFIs). We use a new database from rating agencies, covering 379 for‐profit and nonprofit MFIs in 67 countries over 2002–2008. Controlling for interest rate ceilings and other country‐specific factors, we first find that nonprofits are relatively insensitive to industry‐wide concentration changes, while for‐profits charge significantly lower rates in less concentrated markets. Second, we find spillover effects between the for‐profit and nonprofit segments. Third, we show that the effects of concentration are consistent with an information dispersion mechanism.

To profit or not to profit? Assessing financial sustainability outcomes of microfinance institutions

“…However, as Cull et al () noted, this does not mean that not‐for‐profit MFIs have as good an outreach as for‐profit MFIs, because for‐profit MFIs may have better sources of financing itself in the market. In addition, contrary to what Baquero et al () noted, we find no difference in portfolio at risk (PAR30) between profit and not‐for‐profit MFI's, indicating that clients from both institutions have similar levels of delinquency.…”

“…Cull et al (2007) show that profit-oriented MFIs tend to lend to the "richest of the poor" in order to achieve a higher level of profitability. Also, Baquero, Hamadi, and Heinen (2018) explain that competition has different effects on for-profit and not-for-profit microbanks in outcomes similar to this study.…”

“…In order to further investigate the difference between profit and non‐profit MFIs in the Yield ratio, we subsampled according to firm size. We were motivated to do this analysis because this ratio was the only one that had a significant difference, and according to Baquero et al (), the majority of the non‐profit institutions faces interest rate ceilings, which can hinder our analysis. However, in their sample, the yield spread is higher for non‐profit banks, which means that they have more flexibility to define higher interest rates.…”

Development of the Financial Sector and Growth of Microfinance Institutions: The Moderating Effect of Economic Growth

“…CONC represents the concentration in the microfinance sector, measured through the Herfindahl-Hirschman index [16,59,69].…”

“…A positive relationship is expected, since competition may lead to an increase in loan size, relaxed credit constraints and decreased control over customers, ultimately leading to an increase in the delinquent portfolio. As a result, this increase would slow the growth of MFI credit [58,59,[69][70][71][72][73][74][75].…”