Microfinance and Moneylenders: Long-Run Effects of MFIs on Informal Credit Market in Bangladesh

Abstract

Using two surveys from Bangladesh, this paper provides evidence on the effects of microfinance competition on village moneylender interest rates and households' dependence on informal credit. The views among practitioners diverge sharply: proponents claim that MFI competition reduces both the moneylender interest rate and households' reliance on informal credit, while the critics argue the opposite. Taking advantage of recent econometric approaches that address selection on unobservables without imposing the standard exclusion restrictions, we find that the MFI competition does not reduce moneylender interest rates, thus partially repudiating the proponents. The effects are heterogeneous; there is no perceptible effect at low levels of MFI coverage, but when MFI coverage is high enough, the moneylender interest rate increases significantly. In contrast, households' dependence on informal credit tends to go down after becoming MFI member, which contradicts part of the critic's argument. The evidence is consistent with a model where MFIs draw away better borrowers from the moneylender, and fixed costs are important in informal lending.

Does microfinance change informal lending in village economies? Evidence from Bangladesh

“…This paper uses the same dataset as us and addresses a similar question. However, our contribution differs from that of Berg et al (2013) in several important respects. First, the dataset contains three rounds of surveys (1987,2000,2008).…”

“…The paper closest to our own work is Berg et al (2013). This paper uses the same dataset as us and addresses a similar question.…”

“…First, the dataset contains three rounds of surveys (1987,2000,2008). Berg et al (2013) only use data from the 2000 and 2008 rounds, while we use all three rounds of surveys. This is an important difference because the 1987 survey predated the introduction of microfinance in the villages.…”

“…Second, our study also differs from Berg et al (2013) in that we examine both the intensive and extensive margin of the extent of informal borrowing while the latter focuses on the intensive margin. Third, unlike Berg et al (2013) we examine the welfare implications of microfinance, and investigate the heterogeneous effects between husbands and wives (intrahousehold borrowing) and across different occupations and poverty status.…”

Microfinance spillovers: A model of competition in informal credit markets with an application to Indian villages

“…Mallick (2012) hypothesizes that micronance might have increased the demand for moneylenders' credit, either because of rigid repayment schedules imposed by MFIs or the small size of MFIs' loans with respect to indivisible investment projects, but cannot test it. Berg et al (2013) perform a careful analysis of the demand for informal credit in Bangladesh and show that it actually goes down with the penetration of micronance. They suggest that their ndings are consistent with a model where MFIs draw away better borrowers from the moneylender and/or where xed costs are important in informal lending.…”