Microfinance institutions (MFIs) have achieved phenomenal success in expanding credit to poor households in rural areas all around the world. Indeed, microfinance movement is widely recognized as “an important liberating force” and an “ever more important instrument in the struggle against poverty” (the 2006 Nobel Peace Prize committee while awarding the prize to M. Yunus and the Grameen Bank). In recent years, however, there has been a dramatic increase in competition among the MFIs. Wall Street Journal (27.11.2001) reports that in Bangladesh, “… 23% to 43% of families borrowing from micro lenders in Tangail, borrow from more than one.” Similar phenomenon has also been reported for other developing countries, such as Bolivia, Uganda, and India as well (Vogelsang, 2003, McIntosh et al., 2005, Srinivasan, 2010).
Has increased competition improved the welfare of the rural borrowers? The conventional wisdom on this question appears to be mixed. On one hand, it has been argued that the competition will weed out inefficiencies, improving repayment behavior and lowering of interest rates. Critics of this viewpoint, however, argue that increased competition leads to a breakdown of `the restriction of one borrower from one household’ resulting in higher rates of default. In recent years, this view has gained some prominence and has become an important policy concern of governments in developing countries including that of Bangladesh.
The objective of this study is to evaluate the impact of MFI competition by conducting a randomized control trial (RCT) in Bangladesh. To undertake this study, we collaborate with RDRS, a large local MFI in Bangladesh. Since its inception in 1972, RDRS has largely been operating in the northwest region of the country. It is currently expanding its operation in the northeast region. In these areas, we study the effects of competition on repayment incentives and see whether modification of the existing lending contracts can lead to higher business activities, technology adoption in agriculture, and over all income.