Competition and Microcredit Interest Rates

How does competition affect interest rates for microfinance borrowers?
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This focus note analyzes microfinance experiences of Uganda, Bangladesh and Bolivia to examine whether competition results in lower interest rates to microfinance customers.

The note aims to help MFIs, policy makers and donors assess the stage of development of competition in a particular market, and determine whether appropriate conditions are in place to foster sustained interest rate reduction.

The paper examines the conditions under which competition would lead to interest rate decline. It finds that Uganda is entering an era of rate competition that will lead to rate decline. Bangladesh is in a consolidation phase, with a saturated market that would delay decline in rates. Bolivia has sustained price declines that started early. The paper identifies interventions for donors wanting to promote pro-consumer microfinance, and lists implications of competition among MFIs. It states that:

  • MFIs should prepare for the effects of intensifying competition;
  • Decreased rates will expand overall markets;
  • More borrowers will be able to afford microloans;
  • MFIs will be forced to compete against established bank brands;
  • Consistent policies that promote fair competition must be implemented.