Information Sharing among Competing Microfinance Providers

This paper examines the private information sharing incentives of microfinance institutions (MFIs) under two alternative formulations:

• One, where the MFI seeks to maximize the welfare of its borrowers;
• Another, where it seeks to maximize the volume of its lending, "throughput".

The paper:

• First examines the optimal loan contract when the MFI is the only lender and then looks at the consequences of competition in the case of both formulations;
• Contrasts these results with the case of a profit-maximizing bank.

The paper:

• Reviews relevant literature on information sharing among MFIs;
• Sets up a theoretical model, and analyzes the impact of information sharing by non-profit MFIs;
• Describes related ongoing research, which provides empirical evidence in the specific context of Bangladesh.

The paper finds that:

• The two formulations imply very different outcomes;
• When MFIs maximize volumes on loans, they offer borrowers loans that are strictly larger then the loan size at which borrower welfare is maximized;
• Competition among MFIs reduces this inefficiency and improves borrowers' repayment incentives;
• In contrast, competition has no effect on the loan contract or on borrower incentives if MFIs seek to maximize borrower welfare.

The paper concludes by emphasizing the importance of microfinance, and access to credit more generally and in the specific context of South Asia.