Do Banks and Microfinance Institutions Compete? Microevidence from Madagascar

This paper examines whether the loan strategy of a microfinance institution is shaped by the entry of a bank. Specifically, we investigate whether the distance between a borrower of a microfinance institution and the closest bank influences loan conditions provided by the microfinance institution. We use an original panel dataset of 32,374 loans granted to 14,834 borrowers provided by one of the largest microfinance institutions in Madagascar between 2008 and 2014. We find that the closer a bank is located to a given MFI borrower, the larger the loan obtained and the less collateral required. We also find that the effect is stronger for clients that could be more easily caught by banks (i.e., large firms and clients without a previous relationship with the MFI).