Emerging Market Finance: The Role of Multinational Banks and Microfinance

This paper analyzes the market for microfinance, and the role and incentives of banks in the process of financial market liberalization.

Over the last decade, there has been large scale liberalization of banking in developing and emerging markets. The paper states that:

• Acquisition of a local bank grants a foreign bank access to soft information;
• Entry mode pattern of banks depends on their efficiency in screening potential borrowers;
• Cross border lending becomes feasible due to increasing efficiency;
• Entry of foreign banks intensifies competition in the host banking market;
• Domestic banks may learn from new competitors and improve their screening skills;
• Impact of foreign bank entry on social welfare in the host country is determined by the competitive environment in the host banking market;
• With an increase in competition, greenfield entry correlates with positive welfare effects and spillovers with less positive welfare effects;
• Smaller loans make MFIs opt for group lending instead of individual lending.

Finally, the paper predicts that microfinance will gain importance over the next few years if MFIs continue to get better access to funds from capital markets.