Banks and Microbanks

We combine two datasets to examine whether the presence of banks affects the profitability and outreach of microfinance institutions. We 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 group lending methods favored by microfinance NGOs). We consider 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 we fail to find strong support for these alternative hypotheses.