Entry of Profit-Motivated Microfinance Institutions and Borrower Welfare

Ratul Lahkar () and Viswanath Pingali

No WP2012-09-04, IIMA Working Papers from Indian Institute of Management Ahmedabad, Research and Publication Department

Abstract: In this paper, we model welfare implications of entry of commercial microfinance institutions (MFIs). We initially characterize equilibrium with a sole fund-constrained benevolent credit institution followed by equilibrium with only profit-motivated MFIs. We show that entry of such MFIs can lead to an increase in interest and default and a decline in screening. However, it can still represent a Pareto improvement since: all agents previously denied credit can obtain loans, and existing clients have the option of seeking loans from MFIs. Finally, we model multiple group formation as an equilibrium mechanism, which allows more efficient risk diversification.

Date: 2012-09-13
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