27 Pages Posted: 14 Mar 2006
Date Written: September 27, 2007
Financial intermediaries worldwide are seeking mechanisms for participating in micro lending. We consider a simple model where a bank may use informed local capitalists as intermediaries for on-lending. But the availability of multiple credit sources provides borrowers with an incentive to default voluntarily, making the bank's on-lending mechanism a non-starter. We explore whether a coalition of local capitalists, effectively limiting borrower's opportunity for defaulting multiple times, might be sufficient to facilitate on-lending. Instead, we find that a monopoly moneylender with superior enforcement technology can out-compete the local capitalist coalition if the moneylender also enjoys the smallest transactions costs of lending. We how that a credible competitive threat to the monopoly moneylender can only arise if the local capitalist coalition can also be made cost-effective either by direct subsidies or by measures such as standardization, economies of scale and implementation of best practices. We argue that Franchising is one potential mechanism that could deliver both cost-efficiencies as well as ability for local capitalists to form a coalition.
Keywords: Microfinance, Microcredit, Moneylender, Franchising
JEL Classification: G21, O17
Suggested Citation: Suggested Citation