Competition and Commercialization in the Microfinance Market: A Literary Review
Jacqueline Strenio
I. Introduction
Microfinance institutions (MFIs) provide credit and other financial services to those turned down by traditional banking establishments. MFIs were developed in the 1970s and first implemented in Bangladesh to combat poverty by providing small loans to poor entrepreneurs. Over the past 0 years, MFIs have proven that the poor can be successful entrepreneurs and more importantly, that they can be relied on to pay back their loans. Emphasizing the original goal behind MFIs – poverty alleviation - many offer other services, including educational workshops and scholarships.
MFIs are now considered an important and valid component in the fight against poverty around the world. In 2006, Dr. Muhammad Yunus and the Grameen Bank drew international attention to the topic when they won the Nobel Prize for their work in microfinancing. Multilateral institutions have also started to pay attention, including the United Nations who declared 00 the year of microfinance.
The success and proven sustainability of MFIs have started to change the market structure in recent years. The potential profitability has encouraged the entrance of for-profit, commercial institutions and created more competition throughout the microfinance sector. In theory, competition for clients should lower the overall interest rates offered on microloans, making them accessible to a larger client base. However, there is no conclusive data on the actual consequences of increasing competition in the microfinance markets, although several economists have developed theoretical predictions (McIntosh, 2005). Some small non-profit MFIs have expressed concern that competition from the for-profit financial sector is actually drawing clients away from their organizations (Dorsey, 007). Indicators such as an expanding borrower population may also be deceiving because more borrowers does not necessarily mean more of the targeted borrowers
– the very poor.
II. Microfinance
As a relatively recent phenomenon, microfinance suffers from a lack of readily available data, which has made a comprehensive economic examination difficult. However, economists have not been deterred. Instead, they have started with topics they are already familiar with, such as the functioning of credit markets. Recent studies characterize microcredit markets as oligopolies, citing the increase in different financial services being offered. Villas-Boas et al. (1999) look specifically at horizontal differentiation as an indicator of the level of competition among banks and argue that less oligopolistic competition leads to less screening which in turn leads to increased information asymmetry. Their findings are inclusive; they determine that this information asymmetry can lead to either an increase or decrease in profits.
Hoppe and Lehmann-Grube (2002) come to a similar conclusion concerning information asymmetry in oligopolistic banking competition. Their focus, though, is on proving that potential borrowers do not view one bank’s services as perfect substitutes for the services of another. Instead, borrowers base their preferences on the size of loans, the offering of different financial.........continued in print edition.
