Is microfinance raising village Income? The issue of excess entry

Abstract

This paper offers new insight into the question of why we have not seen microfinance programs lift beneficiary regions out of poverty. We suggest that the explanation may lie in the industry choice of microfinance participants: if borrowers tend to enter imperfectly competitive sectors, such as retail, there may be a “business-stealing” effect that reduces incomes of existing businesses. Our model shows that microfinance may lower total incomes at the village level. The result is related to the classic Mankiw and Whinston (1986) result on excess entry. The results imply that microfinance organizations may want to steer recipients away from the petty retail sector in some markets.