Competition and Microcredit Interest Rates

Topic :

This article focuses on helping microfinance institutions, 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 article then uses its initial paradigm to analyze the condition of the MFI markets in Bolivia, Bangladesh and Uganda.

The article outlines four stages of competition through market development phases:

  1. Pioneer: In this initial stage firms are few, growth is slow, and the market is concentrated in small areas.
  2. Take-off: At this point the success of the idea causes rapid take growth and expansion in the market. Firms begin to compete in product characteristics and service. The market remains quite fragmented although leaders begin to emerge.
  3. Consolidation: The market growth slows and the numbers of firms reduce as competition drives the market to consolidate with clear leaders emerging. Firms compete on price.
  4. Mature: Steady, natural growth of the established market leaders dominates this market. Firms compete mainly on brand and price.

The article finds that Uganda is at the end of the take-off phase and expects within the next few years to be in the phase of consolidation. Bangladesh seems to have reached the consolidation phase, although the market continues to grow rapidly. Bolivia is entering the maturity phase.

The article concludes with a number of policy and donor recommendations. The recommendations are to require transparent comparable pricing structures by providers, promote consumer financial literacy, collect and assess credible market-level information, and develop reliable consumer credit bureaus.

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