Competition and Altruism in Microcredit Markets

The paper examines the effect of competition on credit supply, borrower welfare and MFI profit. It aims to demonstrate that altruistic behavior can be beneficial for both borrowers and competing MFIs. The microfinance market is crowded with a variety of actors, each with different motivations. Some want to maximize their profits, while others want to reduce poverty. This has increased competition in the microfinance market, without leading to a decrease in interest rates.The paper examines two types of microfinance firms, one that is profit maximizing and another that is altruistic. Examining the market under conditions of monopoly and competition, it demonstrates that:

• MFIs can offer only one contract and screening is not possible in a monopolistic market;
• MFIs are able to differentiate contracts and offer incentives that allow borrower screening in a competitive market;
• Screening is costly for the MFI, but more profitable than direct competition;
• Competition is not necessarily welfare enhancing from the borrower's point of view;
• Borrower welfare is lower under competition than under monopoly under some conditions.