Microfinance institution and moneylenders in a segmented rural credit market

Abstract

Purpose

The effectiveness of microfinance institutions (MFIs) in rescuing poor borrowers from “clutches of” moneylenders has been a much-debated topic over the past few decades. This paper aims to contribute by presenting a model of competition between a socially motivated MFI and profit-maximizing moneylenders when market segmentation exists.

Design/methodology/approach

A principal–agent model is used to characterize equilibrium conditions under scenarios where only moneylenders operate, only MFI operates and when both co-exist to pose comparative results effectively.

Findings

The authors find unambiguous benefits arising when a welfare-maximizing MFI enters the market. However, there are benefits to having local agents like moneylenders on the ground who also have informational advantages.

Originality/value

To the best of authors’ knowledge, this study is the first to evaluate the competition between MFI and moneylenders under the framework of captive and noncaptive segments with a mandatory savings requirement.

Citation

Das, A. and Sinha, U.B. (2024), "Microfinance institution and moneylenders in a segmented rural credit market", Indian Growth and Development Review, Vol. 17 No. 3, pp. 441-469. https://doi.org/10.1108/IGDR-12-2023-0203