Measuring competition in microfinance markets: a new approach

Abstract

This paper employs a relatively new method of competition measurement, the Boone indicator, for data on 521 microfinance institutions (MFIs) in ten vibrant microfinance markets: Bangladesh, India, Nepal, Indonesia, the Philippines, Bolivia, Ecuador, Nicaragua, Mexico and Peru. This approach is able to measure competition on a yearly basis in market segments without considering the entire market, as other well-known methods – for instance, the Panzar-Rosse model – require. Stochastic frontier (SF) models have been employed to estimate the translog cost function (TCF) and then marginal costs are computed. The potential endogeneity of performance and costs are overcome by utilising a two-step GMM estimator. Results show that competition levels vary from country to country, and over the period 2003–2010 India and Nicaragua had the most competitive microfinance loan markets. Competition among the microfinance institutions in Bangladesh and Bolivia declined significantly over time, which may be due to the partial reconstitution of market power by the giant MFIs in these countries. Competition in other countries remained mostly unchanged over the years, in line with the consolidation and revitalisation of respective microfinance markets.