Market Structure and Borrower Welfare in Microfinance

Abstract

Motivated by recent controversies surrounding the role of commercial lenders in microfinance, and calls for regulation of the sector, we analyse borrower welfare under different market structures, considering a benevolent non-profit lender, a for-profit monopolist and a competitive credit market. To understand the magnitude of the effects analysed, we simulate the model with parameters estimated from the MIX Market database. Our results suggest that market power can have severe implications for borrower welfare, while despite possible enforcement externalities competition typically delivers similar borrower welfare to non-profit lending.