The Microfinance Review

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

Competition and Market Power of Microfinance Institutions in India


Affiliations
1 University of Delhi, Delhi, India
     

   Subscribe/Renew Journal


This study aims to analyse the competition in the microfinance sector in India by measuring the market power of Microfinance Institutions (MFIs). Furthermore, it attempts to examine the factors responsible for the observed market power of the MFIs. The study uses unbalanced panel data sample of 127 MFIs of different legal status and size for the period 2005-2016. The data source is the Microfinance Information Exchange (MIX). Lerner index is employed to measure the market power of MFIs. The study finds a moderate increase in the competition level in the microfinance sector. The study does not find evidence of exploitation of clients by large MFIs holding a dominant position in the sector. They are mainly small and Non-Governmental Organisation- type MFIs which are earning higher mark-ups than large MFIs. The findings of the study provide crucial insights into the working of MFIs that would help policymakers to take the necessary steps to nurture healthy competition in the microfinance sector. This study is first of its kind which explicitly focuses on the market structure of the Indian microfinance sector.

Keywords

Microfinance, Indian Microfinance Sector, Market Power, Lerner Index.
User
Subscription Login to verify subscription
Notifications
Font Size

  • Amir, R, (2010): Market Structure, Scale Economies and Industry Performance, Discussion Paper, No 00-08, Department of Economics, University of Copenhagen. Accessed from http://dx.doi.org/10.2139/ssrn.995721, Viewed on 16.06.2019.

  • Anginer, D, A Demirguc-Kunt and M Zhu (2014): “How Does Competition Affect Bank Systemic Risk?”, Journal of Financial Intermediation, Vol. 23, No. 1, pp.1-26.

  • Assefa, E, N Hermes and A Meesters (2013): “Competition and the Performance of Microfinance Institutions”, Applied Financial Economics, Vol. 23, No. 9, pp.767-782.

  • Bain, J S (1951): “Relation of Profit Rate to Industry Concentration: American Manufacturing, 1936-1940”, The Quarterly Journal of Economics, Vol. 65, No. 3, pp.293-324.

  • Bain, J S (1956): Barriers to New Competition - Their Character and Consequences in Manufacturing Industries, Harvard University Press, Cambridge.

  • Bankers Institute of Rural Development (2019): Study on Non-Performing Assets (NPAs) in Self-Help Groups (SHGs), Centre for Research on Financial Inclusion and Microfinance, BIRD, Lucknow.

  • Berger, A, S D Bonime and D Hancock (2000): “Why are bank profits so persisitent? The roles of product market competition, information opacity and regional macroeconomic shocks”, Journal of Banking and Finance, Vol. 24, No. 7, pp.1203-1235.

  • Berger, A and T H Hannan (1998): “The Efficiency Cost of Market Power in the Banking Industry: A Test of the “Quiet Life” and Related Hypotheses”, The Review of Economics and Statistics, Vol. 80, No. 3, pp.454-465.

  • Bikker, J A and K Haaf (2002a): “Measures of Competition and Concentration in the Banking Industry: A Review of the Literature”. Economic and Financial Modelling, Vol 9, No. 2, pp.53-98.

  • Bikker, J A and K Haaf (2002b): “Competition, Concentration and Their Relationship: An Empirical Analysis of the Banking Industry”, Journal of Banking and Finance, Vol. 26, No. 11, pp.2191-2214.

  • Bikker, J A, L Spierdijk and P Finnie (2007): The Impact of Market Structure, Contestability and Institutional Environment on Banking Competition, Discussion Paper Series 07-29, Tjalling C. Koopmans Research Institute, Utrecht University, Netherlands.

  • Boone, J (2008): “A New Way to Measure Competition”, The Economic Journal, Vol. 118, No. 531, pp.1245-1261.

  • Bresnahan, T (1982): “The Oligopoly Solution Concept is Identified”, Economics Letters, Vol. 10, No. 1-2, pp.87-92.

  • Britton, N R (1993): “Permanent Disaster Volunteers: Where Do They Fit?, Nonprofit and Voluntary Sector Quarterly, Vol. 20, No. 4, pp.395-415.

  • Bulow, J and Klemperer, P (2002): “Prices and the Winner’s Curse”, The RAND Journal of Economics, Vol. 33, No. 1, pp.1-21.

  • CGAP (2001): Commercialisation and Mission Drift: The Transformation of Microfinance in Latin America, Occasional Paper No. 5, CGAP, Washington, DC.

  • Cull, R, A Demirguc-Kunt and J Morduch (2009): “Banks and Microbanks”, Journal of Financial Services Research, Vol. 46, No. 1, pp.1-53.

  • De Quidt, J, T Fetzer and M Ghatak (2018): “Market Structure and Borrower Welfare in Microfinance”, Economic Journal, Vol. 128. No. 610, pp.1019-1046.

  • Demirgüç-Kunt, A and M S Martínez Pería (2010): A Framework for Analyzing Competition in the Banking Sector: An Application to the Case of Jordan, Policy Research Working Paper No. 5499, World Bank, Washington, DC.

  • Demsetz, H (1973): “Industry Structure, Market Rivalry, and Public Policy”, Journal of Law and Economics, Vol. 16, No. 1, pp.1-9.

  • Elzinga, K G and D E Mills (2011): “The Lerner Index of Monopoly Power: Origins and Uses”, American Economic Review, Vol. 101, No. 3, pp.558-564.

  • Fernandez de Guevara, J, J Maudos and F Perez (2005): “Market Power in European Banking Sectors”, Journal of Financial Services Research, Vol 27, No. 2, pp.109-137.

  • Fungáčová, Z and L Weill (2013): “Does Competition Influence Bank Failures? Evidence from Russia”, Economics of Transition and Institutional Change, Vol. 21, No. 2, pp.301-322.

  • Goddard, J and J Wilson (2009): “Competition in Banking: A Disequilibrium Approach”, Journal of Banking and Finance, Vol. 33, No. 12, pp.2282-2292.

  • Guha, B and P Roy Chowdhury (2013): “Micro-finance Competition: Motivated Microlenders, Double-dipping and Default”, Journal of Development Economics, Vol. 105, No. C, pp.86-102.

  • Hermes, N, R Lensink and A Meesters (2009): “Financial Development and the Efficiency of Microfinance Institutions”, Accessed from SSRN: https://ssrn.com/abstract=1396202.

  • Hoff, K and J E Stiglitz (1997): “Moneylenders and Bankers: Price-increasing Subsidies in a Monopolistically Competitive Market”, Journal of Development Economics, Vol.52, No. 2, pp.429-462.

  • Hulme, D and T Arun (2009): “The Future of Microfinance” in D Hulme and T Arun (ed.), Microfinance: A Reader (Eds), Routledge, New York, pp.225-231.

  • Iwata, G (1974): “Measurement of Conjectural Variations in Oligopoly”, Econometrica, Vol. 42, No. 5, pp.947-966.

  • Kar, A K (2016): “Measuring Competition in Microfinance Markets: A New Approach”, . International Review of Applied Economics, Vol. 30, No. 4, pp.423-440.

  • Kranton, R and A Swamy (1999): “The Hazards of Piecemeal Reform: British Civil Courts and the Credit Market in Colonial India”, Journal of Development Economics, Vol. 58, No. 1, pp.1-24.

  • Lahkar, R and V Pingali (2016): “Expansion and Welfare in Microfinance: A Screening Model”, Economic Modelling, Vol. 53, No. C, pp.1-7.

  • Leon, F (2015): Measuring Competition in Banking: A Critical Review of Methods, Accessed from https://halshs.archives-ouvertes.fr/halshs-01015794v2/document.Viewed on 15.06.2019.

  • Lerner, A P (1934): “The Concept of Monopoly and the Measurement of Monopoly Power”, The Review of Economic Studies, Vol. 1, No. 3, pp.157-175.

  • Maudos, J and J F de Guevara (2007): “The Cost of Market Power in Banking: Social Welfare Loss vs. Cost Inefficiency”, Journal of Banking and Finance, Vol. 31, No. 7, pp.2103-2125.

  • McIntosh, C and B Wydick (2005): “Competition and Microfinance”, Journal of Development Economics, Vol. 78, No. 2, pp.271-298.

  • Mersland, R and R Strøm (2010): “Microfinance Mission Drift?”, World Development, Vol.38, No.1, pp.28-36.

  • Mia, Md. A (2018): “Evolution of Market Concentration and Competition in the Microfinance Industry of Bangladesh”, International Journal of Social Economics, Vol.45, No. 6, pp.989-1007.

  • Misra, A (2016): Responsible Finance India Report 2016, Sage, New Delhi. Accessed from https://www.accessdev.org/wp-content/uploads/2017/07/1051-1002-FILE.pdf.Viewed on 10.12.2018.

  • Mueller, D C (1977): “The Persistence of Profits above the Norm”, Economica, Vol. 44, No.176, pp.369-380.

  • Nair, T S (2010): “Commercial Microfinance and Social Responsibility: A Critique”, Economic and Political Weekly, Vol. 45, No. 31, pp.32-37.

  • Navajas, S, J Conning and C Gonzalez-Vega (2003): “Lending Technologies, Competition and Consolidation in the Market for Microfinance in Bolivia”, Journal of International Development, Vol. 15, No. 6, pp.747-770.

  • Navin, N (2015): “Profiting from Poverty? A Case Study of UK based Microfinance Institutions”, MUDRA: Journal of Finance and Accounting, Vol. 2, No. 2, pp.1-19.

  • Navin, N and P Sinha (2019): “Market Structure and Competition in the Indian Microfinance Sector”, Vikalpa, Vol. 44, No. 4, pp.167-181.

  • Olivares-Polanco, F (2005): “Commercialising Microfinance and Deepening Outreach?Empirical Evidence from Latin America”, Journal of Microfinance, Vol. 7, No. 2, pp.47-69.

  • Panzar, J and J Rosse (1987): “Testing for ‘Monopoly’ Equilibrium”, The Journal of Industrial Economics, Vol. 35, No. 4, pp.443-456.

  • Pavelescu, F M (2011): “Some Aspects of the Translog Production Function Estimation”, Romanian Journal of Economics, Vol. 32, No. 1, pp.131-150.

  • Pindyck, R S (1985): “The Measurement of Monopoly Power in Dynamic Markets”, Journal of Law and Economics, Vol. 28, No. 1, pp.193-222.

  • Sa-Dhan (2016): The Bharat Microfinance Report 2016, Accessed from http://indiamicrofinance.com/wp-content/uploads/2016/09/The-Bharat-MicrofinanceReport-2016.pdf. Viewed on 11.9.2018.

  • Schicks, J and R Rosenberg (2011): Too Much Microcredit? A Survey of the Evidence on Over-Indebtedness, Occasional Paper No. 19, CGAP, Washington, DC.

  • Sealey, C W and J T Lindley (1977): “Inputs, Outputs, and a Theory of Production and Cost at Depository Financial Institutions”, The Journal of Finance, Vol. 32, No. 4, pp.1251-1266.

  • Shepherd, W (1982): “Economies of Scale and Monopoly Profits”, In: J. Craven (ed), Industrial Organisation, Antitrust, and Public Policy, Kluwer Nijhoff, Boston.

  • Shepherd, W (1986): “Tobin’s q and the Structure-Performance Relationship: Comment”, American Economic Review, Vol. 76, No. 5, pp.1205-1210.

  • Sriram, M S (2016): Inclusive Finance India Report 2016, Sage, New Delhi.

  • Stiglitz, J E (1987): “Competition and the Number of Firms in a Market: Are Duopolies More Competitive than Atomistic Markets?”, The Journal of Political Economy, Vol. 95, No. 5, pp.1041-1061.

  • Tuckman, H (1998): “Competition, Commercialisation, and the Evolution of Nonprofit Organisational Structures”, Journal of Policy Analysis and Management, Vol. 17, No.2, pp.175-194.

  • Van Tassel, E (2002): “Signal Jamming in New Credit Markets”, Journal of Money, Credit, and Banking, Vol. 34, No. 2, pp.469-490.

  • Vogelgesang, U (2003): “Microfinance in Times of Crisis: The Effects of Competition, Rising Indebtedness, and Economic Crisis on Repayment Behavior”, World Development, Vol.31, No. 12, pp.2085-2114.

  • Weill, L (2013): “Bank Competition in the EU: How Has It Evolved?”, Journal of International Financial Markets, Institutions and Money, Vol. 26, No. C, pp.100-112.


Abstract Views: 276

PDF Views: 0




  • Competition and Market Power of Microfinance Institutions in India

Abstract Views: 276  |  PDF Views: 0

Authors

Nitin Navin
University of Delhi, Delhi, India
Pankaj Sinha
University of Delhi, Delhi, India

Abstract


This study aims to analyse the competition in the microfinance sector in India by measuring the market power of Microfinance Institutions (MFIs). Furthermore, it attempts to examine the factors responsible for the observed market power of the MFIs. The study uses unbalanced panel data sample of 127 MFIs of different legal status and size for the period 2005-2016. The data source is the Microfinance Information Exchange (MIX). Lerner index is employed to measure the market power of MFIs. The study finds a moderate increase in the competition level in the microfinance sector. The study does not find evidence of exploitation of clients by large MFIs holding a dominant position in the sector. They are mainly small and Non-Governmental Organisation- type MFIs which are earning higher mark-ups than large MFIs. The findings of the study provide crucial insights into the working of MFIs that would help policymakers to take the necessary steps to nurture healthy competition in the microfinance sector. This study is first of its kind which explicitly focuses on the market structure of the Indian microfinance sector.

Keywords


Microfinance, Indian Microfinance Sector, Market Power, Lerner Index.

References