Micro-finance Competition: Motivated Micro-lenders, Double-dipping and Default

• Main Authors: GUHA, Brishti, ROY CHOWDHURY, Prabal
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2013
• Subjects: Micro-finance competition; motivated MFIs; double-dipping; default; Finance
• Online Access: https://ink.library.smu.edu.sg/soe_research/1326; https://ink.library.smu.edu.sg/context/soe_research/article/2325/viewcontent/mficompdoubledippingfinalversion.pdf
• Institution: Singapore Management University

We develop a tractable model of competition among motivated MFIs. We find that equilibria may or may not involve double-dipping (and consequently default), with there being double-dipping whenever the MFIs are very profit-oriented. Moreover, in an equilibrium with double-dipping, borrowers who double-dip are actually worse off compared to those who do not. Further, for intermediate levels of motivation, there can be multiple equilibria, with a doubledipping equilibrium co-existing with a no default equilibrium. Interestingly, an increase in MFI competition can lower efficiency, as well as increase the extent of double-dipping and default. Further, the interest rates may go either way, with the interest rate likely to increase if the MFIs are very motivated.