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

Author

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  • Claudia Berg
  • Shahe Emran
  • Forhad Shilpi
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 the 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 MFIs drawaway better borrowers from the moneylender, and fixed costs are important in informal lending.

Suggested Citation

  • Claudia Berg & Shahe Emran & Forhad Shilpi, 2014. "Microfinance and Moneylenders: Long-run Effects of MFIs on Informal Credit Market in Bangladesh," Working Papers 25, Institute of Microfinance (InM).
    • Handle: RePEc:imb:wpaper:25
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    Cited by:

    1. Wang, Bo & Yu, Yunjun & Yang, Ziying & Zhang, Xiaomei, 2021. "Microfinance institutions and Peer-to-Peer lending: What does microfinance competition bring?," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    2. Uduakobong Inyang, 2022. "Risks to credit access in a developing economy:Focus on household characteristics and the choice of credit in the Niger Delta Region of Nigeria," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 11(2), pages 228-240, March.
    3. Emran, M. Shahe & Shilpi, Forhad, 2021. "Microfinance, Moneylenders, and Economic Shocks: An Assessment of the Bangladesh Experience," MPRA Paper 111159, University Library of Munich, Germany.
    4. Demont, Timothée, 2016. "Microfinance spillovers: A model of competition in informal credit markets with an application to Indian villages," European Economic Review, Elsevier, vol. 89(C), pages 21-41.
    5. Islam, Asadul & Nguyen, Chau & Smyth, Russell, 2015. "Does microfinance change informal lending in village economies? Evidence from Bangladesh," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 141-156.
    6. Hoffmann, Vivian & Rao, Vijayendra & Surendra, Vaishnavi & Datta, Upamanyu, 2021. "Relief from usury: Impact of a self-help group lending program in rural India," Journal of Development Economics, Elsevier, vol. 148(C).
    7. Djibril Faye & Zaka Ratsimalahelo, 2022. "Dynamic analysis of the interest rate determinant in microfinance institutions," Working Papers 2022-09, CRESE.
    8. Abhirupa Das & Uday Bhanu Sinha, 2022. "Microfinance institution and moneylenders in a segmented rural credit market," Working papers 324, Centre for Development Economics, Delhi School of Economics.
    9. Mallick, Debdulal & Nabin, Munirul H., 2018. "Cost effectiveness or serving the poor? Factors determining program placement of NGOs in Bangladesh," Economic Modelling, Elsevier, vol. 69(C), pages 281-290.
    10. Giulia Bettin & Claudia Pigini & Alberto Zazzaro, 2020. "Financial Inclusion and Poverty Transitions: An Empirical Analysis for Italy," CSEF Working Papers 577, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    11. Rejaul K. Bakshi & Debdulal Mallick & Mehmet A. Ulubaşoğlu, 2019. "Social capital as a coping mechanism for seasonal deprivation: the case of the Monga in Bangladesh," Empirical Economics, Springer, vol. 57(1), pages 239-262, July.
    12. Cherry Wyle G. Layaoen & Kazushi Takahashi, 2022. "Can microfinance lending crowd out informal lenders? Evidence from the Philippines," Journal of International Development, John Wiley & Sons, Ltd., vol. 34(2), pages 379-414, March.
    13. Minhaj Mahmud & Yasuyuki Sawada & Mari Tanaka, 2022. "Microfinance competition and multiple borrowing: Evidence using panel data from Bangladesh," Review of Development Economics, Wiley Blackwell, vol. 26(2), pages 1164-1188, May.
    14. Rabbani, Atonu & Hasan, Md. Mehadi, 2021. "The role of borrowing in crisis coping among ultra-poor households in rural Bangladesh," Journal of Asian Economics, Elsevier, vol. 73(C).
    15. M. Shahe Emran & Virginia Robano & Stephen C. Smith, 2014. "Assessing the Frontiers of Ultrapoverty Reduction: Evidence from Challenging the Frontiers of Poverty Reduction/Targeting the Ultra-poor, an Innovative Program in Bangladesh," Economic Development and Cultural Change, University of Chicago Press, vol. 62(2), pages 339-380.
    16. Malek, Mohammad Abdul & Kikkawa, Aiko & Azad, Abul Kalam & Sawada, Yasuyuki, 2022. "Rural Development in Bangladesh Over Four Decades: Findings from Mahabub Hossain Panel Data and the Way Forward," ADBI Working Papers 1350, Asian Development Bank Institute.
    17. M. Shahe Emran & A. K. M. Mahbub Morshed & Joseph E. Stiglitz, 2021. "Microfinance and missing markets," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(1), pages 34-67, February.
    18. Bardsley, Peter & Meager, Rachael, 2019. "Competing lending platforms, endogenous reputation, and fragility in microcredit markets," European Economic Review, Elsevier, vol. 112(C), pages 107-126.
    19. Tiziana Venittelli, 2017. "The Impact of Microfinance Institutions on the Informal Credit Market: Evidence from Andhra Pradesh," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 29(2), pages 512-531, April.
    20. Mookherjee, D. & Motta, A., 2016. "A theory of interactions between MFIs and informal lenders," Journal of Development Economics, Elsevier, vol. 121(C), pages 191-200.
    21. Mallick, Debdulal & Zhang, Quanda, 2019. "The Effect of Financial Inclusion on Household Welfare in China," MPRA Paper 95786, University Library of Munich, Germany.

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    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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