Competition and Performance of Microfinance Institutions
This paper examines the effect of competition among MFIs on their performance.
Studies have found that intense competition among MFIs causes lowered borrower selection standards, weakened relationships with customers, multiple borrowing and high defaults. Studies also indicate that 25% of borrowers take loans from at least six MFIs. The microfinance industry has grown rapidly in the past few decades, with a resulting increase in the number of microfinance service providers. The growth of the industry and saturation of markets has led to increased competition among MFIs in many countries.
The study assesses the effect of increased competition on outreach, loan repayment, efficiency and financial performance by constructing a Lerner index. It empirically investigates data from 362 MFIs in 73 countries for the period 1995-2009. Findings include:
- Intense competition is negatively associated with MFI performance and outreach;
- Intense competition is associated with lower loan repayment, lower financial performance and lower efficiency;
- Adverse effect of competition can be overcome without risking microfinance sector growth by ensuring lending standards, enhancing information sharing and promoting efficiency.
