Microfinance institution and moneylenders in a segmented rural credit market

Abhirupa Das and Uday Bhanu Sinha

Indian Growth and Development Review, 2024, vol. 17, issue 3, 441-469

Abstract: Purpose - The effectiveness of microfinance institutions (MFIs) in rescuing poor borrowers from “clutches of” moneylenders has been a much-debated topic over the past few decades. This paper aims to contribute by presenting a model of competition between a socially motivated MFI and profit-maximizing moneylenders when market segmentation exists. Design/methodology/approach - A principal–agent model is used to characterize equilibrium conditions under scenarios where only moneylenders operate, only MFI operates and when both co-exist to pose comparative results effectively. Findings - The authors find unambiguous benefits arising when a welfare-maximizing MFI enters the market. However, there are benefits to having local agents like moneylenders on the ground who also have informational advantages. Originality/value - To the best of authors’ knowledge, this study is the first to evaluate the competition between MFI and moneylenders under the framework of captive and noncaptive segments with a mandatory savings requirement.

Keywords: Microfinance; Market segmentation; Collateral substitution; Mandatory savings; Information asymmetry; D82; O16 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:igdrpp:igdr-12-2023-0203

DOI: 10.1108/IGDR-12-2023-0203

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