Improving MFI Performance in Competitive and Saturated Environment

The paper suggests that the profitability rationale (the establishment of commercial, profit-making microfinance models) has led to an increase in the number of sustainable MFIs and has often driven the same microfinance institutions towards more easily-accessible economic activities and zones in order to limit operational expenses. It notes that rural zones in particular have been neglected for urban areas where operational expenses are lower.

It is argued that this is especially true as a high concentration of competition in some geographic zones and in a number of countries has led to a gradual observation that the diversity of MFI programmes in very competitive markets yields both positive effects (low interest rates, diversification of offer, proximity, etc) and negative effects (higher risk, overindebtedness, occasional unfair competition and profit search geared towards profitable clients).

An environment is said to be saturated and competitive according to a number of factors. These include the presence of many MFIs in one geographic zone, a range of financial services for local microentrepreneurs, MFIs difficulty in accessing new clients or retaining existing ones (high desertion rate), competition between MFIs for new clients, clients committing to multiple MFIs, etc. There are a number of indicators, but the paper points out that the central point is that in such an environment , the offer of financial services, especially loans, is higher than the actual microentrepreneurs’ demand.

In setting out how the performance of MFIs can be improved in a competitive and saturated environment, this paper is based around the following 4 main topics:

  • Ensuring fair competition
  • Controlling the effects of competition on the interest rates
  • Avoiding cross indebtedness: the cause of overindebtedness
  • The consequences of regulation: implementing a suitable legal context

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