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

Published online by Cambridge University Press:  12 August 2025

Jonathan Fu ,
Vasso Ioannidou  and
Mrinal Mishra
Jonathan Fu
Affiliation:
University of Zurich Department of Finance jonathan.fu@df.uzh.ch
Vasso Ioannidou*
Affiliation:
Univerity of London Bayes Business School
Mrinal Mishra
Affiliation:
University of Melbourne Department of Finance mrinal.mishra@unimelb.edu.au
*
vasso.ioannidou@city.ac.uk (corresponding author)
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Abstract

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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.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 30
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Thorsten Beck, Tobias Berg, Fabio Braggion, Angela Gallo, Annette Krauss, Florian Léon, Nicola Limodio, Robert Marquez, Roy Mersland, Kuchulain O’Flynn, Steven Ongena, and Andrea Presbitero for helpful comments and suggestions. All errors are our own.

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