Institutional identity, regional environment, and the competition–efficiency nexus in microfinance

Competition plays an increasingly important role in shaping the performance of microfinance institutions (MFIs), yet its effects on the dual financial and social objectives of the sector remain insufficiently understood, particularly across heterogeneous institutional and regional contexts. This study examines the relationship between competition and the financial and social efficiency of MFIs in member countries of the Organization of Islamic Cooperation (OIC). It contributes to the literature by providing new empirical evidence on the competition–efficiency nexus while explicitly accounting for institutional differences, including nonprofit and for-profit MFIs as well as Islamic and conventional institutions. Furthermore, the study adopts a regionally disaggregated perspective to capture how diverse regulatory, cultural, and economic contexts shape MFI performance. Using a panel of MFIs, market power is proxied by the Lerner index, while financial and social efficiency are estimated through Data Envelopment Analysis (DEA). The results show that competition is negatively associated with financial efficiency, whereas its relationship with social efficiency is more limited. Some differences emerge across institutional and regional contexts, although these heterogeneity patterns are less robust than the main financial-efficiency result. No statistically significant differences are found between Islamic and conventional MFIs. In the baseline estimates, nonprofit MFIs appear to experience a slightly stronger negative association between competition and financial efficiency than for-profit MFIs, although this difference is small and not robust to the correlated random-effects specification. No comparable differences emerge in social efficiency across institutional types. At the regional level, the adverse association between competition and financial efficiency is not uniformly robust once country-clustered inference and multiple-testing correction are considered, while social efficiency does not display a systematic response to competitive pressures. Overall, these findings highlight the need for carefully calibrated differentiated regulatory and policy frameworks that balance financial sustainability with the preservation of the social mission of microfinance institutions, while avoiding strong subgroup-specific conclusions where the evidence is only marginal or exploratory. The analysis is limited by the self-reported nature of MIX Market data and by the availability of public data only up to 2018.