Banking on Competition: The Spillover Effects of Bank Entry into Microfinance

This article examines how the entry of commercial lenders (CLs) transforms microfinance markets, focusing on borrower outcomes and market-wide spillovers.Using detailed credit registry data, we show that increased competition improves loan terms for both graduating and staying borrowers, generating sustained benefits.Our setting also allows us to document what happens when entry fails and entrants retreat following a crisis.Despite increasing defaults, borrowers who graduate to banks experience long-term gains, particularly through lower borrowing costs.Our findings highlight the broader benefits and risks of fostering competition in microfinance, providing valuable insights for policymakers and financial inclusion initiatives.Access to credit is seen as a key driver of economic development (see, e.g., King and Levine (1993), Jith andStrahan (1996), andBeck, Levine, andLoayza (2000)).However, despite the promise of microfinance as a tool for financial inclusion, evidence from randomized controlled trials (RCTs) shows that its impacts on borrowers are often modest and short lived (e.g., Banerjee, Karlan, and Zinman (2015)).This has led to a growing recognition that RCTs may overlook the broader benefits of microfinance by not capturing general equilibrium and spillover effects (Banerjee et al. (2015)).Recent studies have begun to explore these broader impacts.For example, Breza and Kinnan (2021) highlight how microfinance stimulates local economies by increasing local consumption, while Agarwal, Kigabo, Minoiu, Presbitero, and Silva (2023) emphasize its role as a pathway to banks.