Microfinance and Moneylenders: Long-Run Effects of MFIs on Informal Credit Market in Bangladesh
36 Pages Posted: 10 Aug 2013 Last revised: 15 Oct 2013
Date Written: October 14, 2013
Using two surveys from Bangladesh, this paper provides evidence on the effects of microfinance competition on village moneylender interest rates and households’ dependence on informal credit. The views among practitioners diverge sharply: proponents claim that MFI competition reduces both the moneylender interest rate and households’ reliance on informal credit, while the critics argue the opposite. Taking advantage of recent econometric approaches that address selection on unobservables without imposing exclusion restrictions, we find that the MFI competition does not reduce moneylender interest rates, thus partially repudiating the proponents. The effects are heterogeneous; there is no perceptible effect at low levels of MFI coverage, but when MFI coverage is high enough, the moneylender interest rate increases significantly. In contrast, households’ dependence on informal credit tends to go down after becoming MFI member, which contradicts part of the critic’s argument. The evidence is consistent with a model where MFIs draw away better borrowers from the moneylender, and fixed costs are important in informal lending.
Keywords: Microfinance, Moneylenders, Microcredit, Competition, Interest Rate, Informal Borrowing, Bangladesh
JEL Classification: O17, O12, C31
Suggested Citation: Suggested Citation