The purpose of this paper is to examine the effect of competition and regulation on Microfinance Institutions (MFIs) outcomes in India. Using data for 60 MFIs from the MIX Market database for a period of five years from 2008-09 to 2012-13, panel models are estimated for the empirical examinations. In the modeling framework, constructed Lerner’s Index as competition proxy and regulate dummy as regulatory intervention proxy are introduced as interest variables along with the MFI specific and Macro specific control variables to examine their effect on MFIs outcomes. T he study reveals that competition strengthens the outreach, promotes operating efficiency, deteriorates the loan portfolio quality and adversely affects the MFIs profitability. While the regulatory intervention creates some accommodative space for the MFI borrowers, improves MFIs efficiency partially and dampens loan repayments and portfolio quality and profitability via “roe” in India. Our results have also implications on MFIs, fund provider, regulator, government and policy research practitioners. This study contributes towards filling gap in the literature by extending the analysis of the effect of competition and regulation on MFI outcomes to a cross-section of states in India in a panel data framework.
Ghosh, S. and Van Tassel, E. (2011) Microfinance and Competition for External Funding. Economics Letters, 112, 168-170. https://doi.org/10.1016/j.econlet.2011.03.037
Rhyne, E. and Otero, M. (2006) The Changing Face of Microfinance: Closing the Quality Gap. Micro Banking Bulletin, 13, 1-7.
Assefa, E., Hermes, N. and Meesters, A. (2013) Competition and the Performance of Microfinance Institutions. Applied Financial Economics, 23, 767-782. https://doi.org/10.1080/09603107.2012.754541
Vogelgesang, U. (2003) Microfinance in Times of Crisis: The Effects of Competition, Rising Indebtedness, and Economic Crisis on Repayment Behavior. World Development, 31, 2085-2114. https://doi.org/10.1016/j.worlddev.2003.09.004
Kar, A.K. and Swain, R.B. (2014) Interest Rates and Financial Performance of Microfinance Institutions: Recent Global Evidence. The European Journal of Development Research, 26, 87-106. https://doi.org/10.1057/ejdr.2013.33
Demsetz, H. (1974) Toward a Theory of Property Rights. In: Classic Papers in Natural Resource Economics, Palgrave, Macmillan UK, 163-177. https://doi.org/10.1057/9780230523210_9
Earle, J., Estrin, S. and Leshchenko, L. (1996) Ownership Structures, Patterns of Control, and Enterprise Behavior in Russia. Enterprise Restructuring and Economic Policy in Russia, 205-252.
Navajas, S., Conning, J. and Gonzalez-Vega, C. (2003) Lending Technologies, Competition and Consolidation in the Market for Microfinance in Bolivia. Journal of International Development, 15, 747-770. https://doi.org/10.1002/jid.1024
McIntosh, C. and Wydick, B. (2005) Competition and Microfinance. Journal of Development Economics, 78, 271-298. https://doi.org/10.1016/j.jdeveco.2004.11.008
Marquez, R. (2002) Competition, Adverse Selection, and Information Dispersion in the Banking Industry. Review of Financial Studies, 15, 901-926. https://doi.org/10.1093/rfs/15.3.901
Berger, A.N., Dick, A.A., Goldberg, L.G. and White, L.J. (2007) Competition from Large, Multimarket Firms and the Performance of Small, Single-Market Firms: Evidence from the Banking Industry. Journal of Money, Credit and Banking, 39, 331-368. https://doi.org/10.1111/j.0022-2879.2007.00028.x
Cull, R. and Morduch, J. (2007) Financial Performance and Outreach: A Global Analysis of Leading Microbanks. The Economic Journal, 117, 107-133. https://doi.org/10.1111/j.1468-0297.2007.02017.x
Gonzalez, A. (2010) Is Microfinance Growing Too Fast? MIX Data Brief No. 5.
Claessens, S. (2009) Competition in the Financial Sector: Overview of Competition Policies. The World Bank Research Observer, 24, 83-118. https://doi.org/10.1093/wbro/lkp004
Kai, H. (2009) Competition and Wide Outreach of Microfinance Institutions. Munich.
Meyer, R.L. (2010) Microfinance, Poverty Alleviation and Improving Food Security: Implications for India. Food Security and Environmental Quality in the Developing World, 347.
Tabak, B.M., Fazio, D.M. and Cajueiro, D.O. (2012) The Relationship between Banking Market Competition and Risk-Taking: Do Size and Capitalization Matter? Journal of Banking & Finance, 36, 3366-3381. https://doi.org/10.1016/j.jbankfin.2012.07.022
Franks, J.R. (2000) Macroeconomic Stabilization and the Microentrepreneur. Journal of Microfinance, 2, 69-91.
Cull, R., Demirgüc-Kunt, A. and Morduch, J. (2011) Does Regulatory Supervision Curtail Microfinance Profitability and Outreach? World Development, 39, 949-965. https://doi.org/10.1016/j.worlddev.2009.10.016
Christen, R.P., Lyman, T.R. and Rosenberg, R. (2003) Microfinance Consensus Guidelines: Guiding Principles on Regulation and Supervision of Microfinance. CGAP, The World Bank Group, Washington DC.
Ndambu, J. (2011) Does Regulation Increase Microfinance Performance in Sub-Saharan Africa? Frankfurt School of Finance & Management, Frankfurt.
Wanjiru, M.C. (2012) Effect of Financial Regulation on Financial Performance of Deposit-Taking Microfinance Institutions in Kenya. Unpublished MBA Project, University of Nairobi, Nairobi.
Yu, V., Damji, R., Vora, V. and Anand, L. (2014) Regulation on Microfinance: Effect upon Profitability and Loan Diversity. UChicago Undergraduate Business Journal, 1-20.
Hartarska, V. and Nadolnyak, D. (2007) Do Regulated Microfinance Institutions Achieve Better Sustainability and Outreach? Cross-Country Evidence. Applied Economics, 39, 1207-1222. https://doi.org/10.1080/00036840500461840
De Guevara, J.F. and Maudos, J. (2004) Measuring Welfare Loss of Market Power: An Application to European Banks. Applied Economics Letters, 11, 833-836. https://doi.org/10.1080/1350485042000263908
Hermes, N., Lensink, R. and Meesters, A. (2009) Financial Development and the Efficiency of Microfinance Institutions. https://doi.org/10.2139/ssrn.1396202
Yaron, J. (1992) Assessing Development Finance Institutions: A Public Interest Analysis. World Bank Policy Research Working Paper, Paper No. 174, Washington DC.
Schreiner, M. (2001) Informal Finance and the Design of Microfinance. Development in Practice, 637-640.
Olivares-Polanco, F. (2005) Commercializing Microfinance and Deepening Outreach? Empirical Evidence from Latin America. ESR Review, 7, 47.
Ahlin, C., Lin, J. and Maio, M. (2011) Where Does Microfinance Flourish? Microfinance Institution Performance in Macroeconomic Context. Journal of Development Economics, 95, 105-120. https://doi.org/10.1016/j.jdeveco.2010.04.004
Cull, R., Asli Demirgüc-Kunt, A. and Morduch, J. (2009) Microfinance Meets the Market. Journal of Economic Perspectives, 23, 167-192. https://doi.org/10.1257/jep.23.1.167