Micro-finance competition: Motivated micro-lenders, double-dipping and default

Abstract

We develop a tractable model of competition among motivated MFIs. We find that equilibria may or may not involve double-dipping (and consequently default), with there being double-dipping whenever the MFIs are very profit-oriented. Moreover, in an equilibrium with double-dipping, borrowers who double-dip are actually worse off compared to those who do not. Further, for intermediate levels of motivation, there can be multiple equilibria, with a doubledipping equilibrium co-existing with a no default equilibrium. Interestingly, an increase in MFI competition can lower efficiency, as well as increase the extent of double-dipping and default. Further, the interest rates may go either way, with the interest rate likely to increase if the MFIs are very motivated.

Microfinance and dynamic incentives

“…Due to an expansion of micro-credit, borrowers often have access to multiple loans from different lenders ( Guha and Chowdhury (2013) provide a model with double-dipping where borrowers face ex-ante moral hazard, and taking more than one loan is always inefficient and always leads to default. It shows that increased competition A C C E P T E D M A N U S C R I P T…”

What Causes Multiple Borrowing in Microfinance? A Developing Country Experience

“…Guha and Chowdhury ( ) argued that the structure of the sector encourages multiple borrowing. They found that competition between socially motivated MFIs may enhance multiple borrowing, which also increases the risk of loan default.…”

The insurance premium in the interest rates of interlinked loans in a small-scale fishery

“…The expansion of financial services impacts interest rates of micro finance institutions (Guha and Chowdhury, 2013) and of money lenders (Mallick, 2012). 6 Gin and Yang (2009) observe a lower loan take-up when the loan is coupled with a weather insurance that implies an upfront payment.…”