Banks and Microbanks

Abstract

Using two new datasets, the authors
 examine whether the presence of banks affects the
 profitability and outreach of microfinance institutions.
 They find evidence that competition matters. Greater bank
 penetration in the overall economy is associated with
 microbanks pushing toward poorer markets, as reflected in
 smaller average loans sizes and greater outreach to women.
 The evidence is particularly strong for microbanks relying
 on commercial funding and using traditional bilateral
 lending contracts (rather than the group lending methods
 favored by microfinance nongovernmental organizations). The
 analysis considers plausible alternative explanations for
 the correlations, including relationships that run through
 the nature of the regulatory environment and the structure
 of the banking environment; but it fails to find strong
 support for these alternative hypotheses.