Microfinance Tradeoffs: Regulation, Competition, and Financing

Meeting social goals and maximizing financial performance

This paper describes important trade-offs that microfinance practitioners, donors and regulators navigate.It draws on evidence from large, global surveys of MFIs and finds a basic tension between meeting social goals and maximizing financial performance. The study finds that:

  • Raising interest rates improves profitability for many institutions but, beyond a point, higher rates are associated with increased loan delinquencies and diminished profits;
  • Financial sustainability and serving poor households are not incompatible;
  • Most institutions serving the poorest customers earn profits too small to attract investors seeking purely commercial returns;
  • Substantial share of non-profit organizations earn profits, even if they are relatively small;
  • Non-profits do not duplicate the work of commercial lenders as they tend to make far smaller loans on average and serve more women;
  • Rigorous and regular supervision is critical, but costly, for deposit taking institutions;
  • Regulatory supervision tends to push institutions to serve relatively better-off customers to maintain profitability;
  • Competition from mainstream, formal-sector banks steers MFIs towards serving poorer customers.

Study results suggest that developing meaningful interventions requires making deliberate choices and thus embracing and weighing tradeoffs carefully.

About this Publication

By Cull, R., Demirgüç-Kunt, A. & Morduch, J.