Impact of Competition on Social Performance of MFIs: Comparative Analysis of India and Bangladesh

Abstract

Although studies encompassing the different aspect of microfinance like sustainability of microfinance institutions (MFIs), role of microfinance in poverty alleviation, etc., have enriched the literature from time to time, studies on competition and its impact on social performance of MFIs are scarce. There also exists lacking consensus as to how can competition influence MFIs’ social performance. The empirical evidence reveals duality of opinion. With information asymmetry, competition enhances borrowers’ indebtedness and lowers expected loan repayment and impeding loan quality. Furthermore, in order to overcome these problems, MFIs would engage in more screening that raises their operational costs. This encumbers the sustainability of MFIs. Thus, the socially oriented MFIs, in order to remain sustainable, start targeting the less poor borrowers. But the other view holds that as competition intensifies, it provokes the MFIs to remain committed with the social objective and to strive to retain the clients. The theory on impact of competition on the social performance of MFIs may be either positive or negative, which calls for further investigation. Against this backdrop, this article attempts to assess the impact of competition on social performance of MFIs in India and Bangladesh. The study is conducted over 53 MFIs from India and 20 MFIs from Bangladesh on which a complete set of data is available. The study period is confined to 9 years from 2009 to 2017. In order to establish the association between competition and MFIs’ social performance, panel data regression is used. The study takes into account the depth and breadth of outreach as the dependent variable. The study uses panel data regression to establish the association between competition and social performance of MFIs. The empirical analysis reveals that competition has no significant association with any of the measures of social performance. This implies that social performance in the sector is explained by other factors. Amongst the country-specific variables, it is clear from analyses that gross domestic product (GDP) and inflation are important determining factors of MFIs’ social performance. Country of origin (COO) of the MFIs is one of the determining factors for social performance as it is found to be significant for three out of the four models. It is also evident from the analyses that Bangladeshi MFIs have a greater impact on MFIs’ social performance in terms of outreach in comparison to Indian MFIs. While for percentage of female borrowers (PFB), Indian MFIs account for greater depth of outreach in comparison to Bangladesh.