Scandinavian Working Papers in Economics

Working Paper Series,
Uppsala University, Department of Economics

No 2014:8: Competition, performance and portfolio quality in microfinance markets

Ashim Kumar Kar () and Ranjula Bali Swain ()
Additional contact information
Ashim Kumar Kar: Helsinki Center of Economic Research (HECER), Postal: P.O. Box 17 (Arkadiankatu 7), FI-00014, University of Helsinki
Ranjula Bali Swain: Department of Economics, Postal: Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: In recent years growing competition in the microfinance industry has been censured for multiple borrowing, default crises, high interest rates and coercive recovery of loans. Using the Boone indicator as a measure for competition, our paper investigates the impact of competition on microfinance institutions’ (MFIs) outreach, financial performance and quality of loan portfolio. We deal with the potential endogeneity issues by employing the instrumental variable approach using the generalized methods of moments (GMM) estimation technique. Analysing the Microfinance Information Exchange data our empirical results show that increased competition in microfinance sector leads to a larger average loans and a decrease in the financial self-sustainability. The data also supports the view that increased competition in the microfinance industry leads to a decline in the loan portfolio quality.

Keywords: microfinance institutions; competition; outreach; financial performance; capitalization; panel data IV estimation

JEL-codes: G21; G32

33 pages, October 31, 2014

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