Microfinance and Moneylenders: Long-Run Effects of Mfis on Informal Credit Market in Bangladesh

38 Pages Posted: 20 Apr 2016

See all articles by Claudia N. Berg

Claudia N. Berg

International Monetary Fund (IMF)

M. Shahe Emran

George Washington University - Department of Economics

Forhad Shilpi

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 3 versions of this paper

Date Written: September 1, 2013

Abstract

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 competition of microfinance institutions 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 standard exclusion restrictions, this paper finds that microfinance 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 coverage, but when microfinance coverage is high enough, the moneylender interest rate increases significantly. In contrast, households' dependence on informal credit tends to go down after they become a member of a microfinance institution, which contradicts part of the critic's argument. The evidence is consistent with a model where microfinance institutions draw away better borrowers from the moneylender, and fixed costs are important in informal lending.

Keywords: Access to Finance, Debt Markets, Banks & Banking Reform, Economic Theory & Research, Emerging Markets

Suggested Citation

Berg, Claudia N. and Emran, M. Shahe and Shilpi, Forhad, Microfinance and Moneylenders: Long-Run Effects of Mfis on Informal Credit Market in Bangladesh (September 1, 2013). World Bank Policy Research Working Paper No. 6619. Available at SSRN: https://ssrn.com/abstract=2330629

Claudia N. Berg

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

M. Shahe Emran

George Washington University - Department of Economics ( email )

2115 G Street NW
302 Monroe Hall
Washington, DC 20052
United States

Forhad Shilpi

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-458-7476 (Phone)
202-522-1151 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
64
Abstract Views
495
rank
154,216
PlumX Metrics