Microfinance Competition: Motivated Microlenders, 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; Socially motivated MFIs; Double-dipping; Default; Subsidized credit; Interest cap; Finance; Growth and Development
• Online Access: https://ink.library.smu.edu.sg/soe_research/1528
• Institution: Singapore Management University

We develop a tractable model of competition among socially motivated MFIs, so that the objective functions of the MFIs put some weight on their own clients' utility. We find that the equilibrium involves double-dipping, i.e. borrowers taking multiple loans from different MFIs, whenever the MFIs are relatively profit-oriented. Further, double-dipping necessarily leads to default and inefficiency, and moreover, borrowers who face relatively higher transactions costs optimally decide to double-dip. Interestingly, an increase in MFI competition can increase the extent of double-dipping and default. Further, the interest rates may go either way, with the interest rate likely to increase with more competition if the MFIs are very socially motivated.