Abstract
This chapter assesses welfare implications of intensified competition among microfinance institutions (MFIs) arising from the high level of subsidy toward MFIs in Bangladesh. It shows that demand of microfinance products is substitutable across MFIs. Such high substitution sheds a note of caution on subsidizing different MFIs simultaneously. Our simple welfare calculation shows that only around 30% of all upazilas (sub-districts) would not have been able to accommodate the entry of MFIs without the existing subsidies, and only 10% of upazilas are experiencing improvements in welfare by subsidized entry at a reasonable assumption on return of microfinance. In other words, substantially high return of microfinance for borrowers should be present to justify the current level of subsidies to MFIs in Bangladesh.
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Notes
- 1.
There are, of course, other dimensions of the competition of MFIs other than entry. For example, in the context of Bangladesh, Khandker et al. (2013) investigate the effect of competition on pricing of products, targeting strategies and portfolio shifts, as well as their ability to recover loans. They find no evidence that newer microfinance institutions are less risk-averse in their targeting, or that increased borrowing among households due to microfinance institution competition has lowered recovery rates. Our analysis essentially fixes these other components of the competition, and discusses the welfare implication of the subsidy through entry.
- 2.
It should be noted that these data were also used in Salim (2013).
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Sawada, Y., Miyauchi, Y., Yamasaki, J. (2018). Welfare Implications of Subsidies in the Microfinance Industry in Bangladesh. In: Sawada, Y., Mahmud, M., Kitano, N. (eds) Economic and Social Development of Bangladesh. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-63838-6_3
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