Competition, Loan Rates and Information Dispersion in Microcredit Markets

Abstract

We study the effects of competition on loan rates and loan portfolio quality in microcredit markets using a new database from rating agencies, covering 379 for-profit and nonprofit microfinance institutions (MFIs) in 67 countries over 2002-2008. First, we find competitive pressures from increased market share of for-profits. Second, we find that nonprofits are relatively insensitive to concentration changes, while they appear to sustain their competitive advantage stemming from proprietary information on borrowers. In contrast, for-profits charge significantly lower rates and exhibit improved portfolio quality in less concentrated markets. We show that this effect is consistent with an information dispersion mechanism.

Keywords: Loan rates, bank competition, microfinance, information dispersion, portfolio quality, nonprofit institutions

JEL Classification: D4, G21, L1, O1