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Small Business Economics

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11-09-2019

Refinancing MFIs with market power: theory and evidence

Authors: Lutz G. Arnold, Benedikt Booker, Gregor Dorfleitner, Michaela Röhe

Published in: Small Business Economics | Issue 4/2021

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Abstract

Microfinance investment vehicles (MIVs) play an increasingly important role as a source of funding for microfinance institutions (MFIs). This paper presents theory and evidence on the relation between the use of MIV capital and MFI market power. We present a model in which MIVs are social-minded in that they do not lend to MFIs which exploit their market power in the market for microcredit. Consistent with the theoretical model, we find empirically that measures of MFI market power are negatively related to the likelihood of using MIV capital. This suggests that MIVs play an effective role in promoting social objectives in microfinance.

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If MFIs can endogenously determine the size of the penalty, it makes no difference whether repayment is private or public (see RS, p. 261).

Our results remain valid qualitatively for any non-negative private versus public transaction cost differential.

With no sunk cost (and positive surplus), commercial lending is profitable irrespective of the distribution of bargaining power between MFIs and microborrowers.

Nowadays, microfinance also exists in developed countries (Bourlès and Cozarenco 2018). The major part of this business still is located in developing countries, however.

As the standard deviation of NIM is 0.172 in the respective sample, a change of one percentage point can be considered as relatively small.

If we are not able to obtain information on the lending methodology for 2009, we employ data from 2008 or 2010 when available.

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Title: Refinancing MFIs with market power: theory and evidence
Authors: Lutz G. Arnold
Benedikt Booker
Gregor Dorfleitner
Michaela Röhe
Publication date: 11-09-2019
Publisher: Springer US
Published in: Small Business Economics / Issue 4/2021
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-019-00252-8

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