How Can MFIs Best Work in Competitive and Saturated Markets?

This paper was commissioned by the Microcredit Summit Campaign in 2006.The paper argues that:

• Competition among microfinance institutions (MFIs) has yielded:
  • positive effects - low interest rates, diversification of offer, proximity, etc.,
  • negative effects - high risk, over indebtedness, unfair competition and profit search;
• MFIs should not lose sight of their responsibilities to their clients and the microfinance sector;
• Competition often results in financial difficulties for MFIs as well as difficulties in long-term cost recovery.

The paper examines:

• The features of a competitive and saturated market.
• The methods that ensure fair competition.
• Ways in which MFIs and donors can control the effects of competition on interest rates; these include anticipating, monitoring and compensating the decrease in rates.
• The problems of cross-indebtedness the cause of over-indebtedness.
• The role and advantages of credit bureaus.
• The consequences of regulation and the implementation of a suitable legal context including:
  • Consumer protection;
  • Notification of interest rates;
  • No limits on interest rates.

The paper concludes that in a saturated, competitive market:

• A legal framework that encourages the setting up of credit and information exchange bureaus would enable the smooth running of microfinance operations;
• The application of measures to protect consumers and to encourage transparency would ensure the viability of microfinance.