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Competition, Performance and Portfolio Quality in Microfinance Markets

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Abstract

Growing competition in microfinance has been blamed for multiple borrowing, over-indebtedness and loan repayment crisis in recent times. Using the Boone indicator as a proxy for competition, in this paper we investigate how competition impacts the outreach, financial performance and loan portfolio quality of microfinance institutions (MFIs). The analysis is based on data from 568 MFIs in ten vibrant microfinance markets (Bangladesh, Bolivia, Ecuador, India, Indonesia, Mexico, Nepal, Nicaragua, Peru and Philippines) for the period 2003–2014. We control for potential endogeneity of MFI performance, competition and other covariates by employing the generalized method of moments (GMM) estimation technique. We find that increased competition leads to higher profitability and better loan portfolio quality of the sampled MFIs, but worsens depth of outreach to the poor, which is an indication of mission drift.

La concurrence croissante dans le secteur de la microfinance a récemment été pointée du doigt comme responsable des problèmes d’emprunts multiples, de surendettement et de crise de remboursement de prêts. En utilisant l’indicateur Boone comme indicateur indirect de la concurrence, nous étudions dans cet article comment la concurrence influence la portée, la performance financière et la qualité du portefeuille de prêts des institutions de microfinance (IMF). L’analyse se base sur les données de 568 IMF dans 10 marchés de microfinance dynamiques (Bangladesh, Bolivie, Équateur, Inde, Indonésie, Mexique, Népal, Nicaragua, Pérou et Philippines) pour la période 2003–2014. Nous réduisons le risque potentiel d’endogénéité des performances des IMF, de la concurrence et d’autres covariables en utilisant la méthode d’estimation appelée méthode des moments généralisée (MMG). Pour les IMF échantillonnées, nous constatons qu’une concurrence accrue conduit à une rentabilité plus élevée et à une meilleure qualité du portefeuille de prêts, mais entraîne une accessibilité bien plus mauvaise pour les plus pauvres, ce qui indique une dérive de la mission.

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Authors and Affiliations

  1. Helsinki Center of Economic Research (HECER), University of Helsinki, Arkadiankatu 7, 00101, Helsinki, Finland

    Ashim Kumar Kar

  2. Misum, Stockholm School of Economics, Stockholm, Sweden

    Ranjula Bali Swain

  3. Department of Economics, Södertörn University, Stockholm, Sweden

    Ranjula Bali Swain

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  1. Ashim Kumar Kar
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Correspondence to Ashim Kumar Kar.

Appendix

Appendix

See Tables 8, 9, 10 and 11.

Table 8 Correlation coefficient matrix of explanatory variables
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Table 9 Effect of competition on depth of outreach
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Table 10 Effect of competition on financial sustainability
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Table 11 Effect of competition on loan portfolio quality
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Kar, A.K., Bali Swain, R. Competition, Performance and Portfolio Quality in Microfinance Markets. Eur J Dev Res 30, 842–870 (2018). https://doi.org/10.1057/s41287-018-0135-6

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