Microfinance Tradeoffs: Regulation, Competition, and Financing

This paper describes important trade-offs that microfinance practitioners, donors and regulators navigate.It draws on evidence from large, global surveys of MFIs and finds a basic tension between meeting social goals and maximizing financial performance. The study finds that:

• Raising interest rates improves profitability for many institutions but, beyond a point, higher rates are associated with increased loan delinquencies and diminished profits;
• Financial sustainability and serving poor households are not incompatible;
• Most institutions serving the poorest customers earn profits too small to attract investors seeking purely commercial returns;
• Substantial share of non-profit organizations earn profits, even if they are relatively small;
• Non-profits do not duplicate the work of commercial lenders as they tend to make far smaller loans on average and serve more women;
• Rigorous and regular supervision is critical, but costly, for deposit taking institutions;
• Regulatory supervision tends to push institutions to serve relatively better-off customers to maintain profitability;
• Competition from mainstream, formal-sector banks steers MFIs towards serving poorer customers.

Study results suggest that developing meaningful interventions requires making deliberate choices and thus embracing and weighing tradeoffs carefully.