Microfinance Competition in the Presence of Moneylenders: Theory and Evidence

Despite the growth of the microfinance sector, informal lending, including by moneylenders, continues to thrive in much of the developing world. In this paper’s dynamic model, borrowers take productive loans from microfinance institutions (MFIs), and bridge loans from moneylenders in case of a production shock. In such settings of complementarity between MFI and moneylender loans, both MFI and moneylender lending decreases in equilibrium due to reduced repayment discipline and heightened lending risk, reducing borrower utility. In an RCT in Bangladesh, we test these predictions, and find evidence for MFI competition reducing borrowing from moneylenders, with no effect on borrowing from MFIs, and suggestive evidence for it decreasing moneylender interest rates.