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

Berg, Claudia and Emran, Shahe and Shilpi, Forhad (2015): 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 critics argue the opposite. Taking advantage of recent econometric approaches that address selection on unobservables without imposing 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 either MFIs or moneylenders engage in cream skimming, and fixed costs are important in informal lending.

• Item Type: MPRA Paper
• Language: English
• Keywords: Microfinance, Moneylenders, Microcredit, Interest Rates, Informal Borrowing, Long-run Effects, Bangladesh, Identification through Heteroskedasticity
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O12 - Microeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors ; Shadow Economy ; Institutional Arrangements

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