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Abstract:

Development Discussion Paper
Market Structure and Borrower Welfare in Microfinance
Jonathan de Quidt, Thiemo Fetzer and Maitreesh Ghatak
September 2012
Paper No' EOPP 040:
Full Paper (pdf)

JEL Classification: G21, O12, D4, L4, D82


Tags: microfinance; market power; for-profit; social capital

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.