DP9165 Market Structure and Borrower Welfare in Microfinance

Author(s): Jonathan de Quidt , Thiemo Fetzer , Maitreesh Ghatak

Publication Date: October 2012

Keyword(s): for-profit , market power , microfinance , social capital

JEL(s): D4 , D82 , G21 , L4 , O12

Programme Areas: Development Economics , Financial Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP9165.asp

Motivated by recent controversies surrounding the role of commercial lenders in microfinance, we analyze borrower welfare under different market structures, considering a benevolent non-profit lender, a for-profit monopolist, and a competitive credit market. To understand the magnitude of the effects analyzed, we simulate the model with parameters estimated from the MIX Market database. Our results suggest that market power can have severe implications for borrower welfare, while despite possible information frictions competition typically delivers similar borrower welfare to non-profit lending. In addition, for-profit lenders are less likely to use joint liability than non-profits.