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

Jonathan Fu, Vasso Ioannidou, and Mrinal Mishra

♦ This paper examines how the entry of commercial lenders 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.

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