Market Structure and Borrower Welfare in Microfinance

Abstract

Motivated by recent controversies surrounding the role of commercial lenders in microfinance, and calls for regulation of the sector, 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 enforcement externalities competition typically delivers similar borrower welfare to non-profit lending.

Keywords: microfinance, market power, for-profit, social capital

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