Competition and Market Power of Microfinance Institutions in India

This study aims to analyse the competition in the microfinance sector in India by measuring the market power of Microfinance Institutions (MFIs). Furthermore, it attempts to examine the factors responsible for the observed market power of the MFIs. The study uses unbalanced panel data sample of 127 MFIs of different legal status and size for the period 2005-2016. The data source is the Microfinance Information Exchange (MIX). Lerner index is employed to measure the market power of MFIs. The study finds a moderate increase in the competition level in the microfinance sector. The study does not find evidence of exploitation of clients by large MFIs holding a dominant position in the sector. They are mainly small and Non-Governmental Organisation- type MFIs which are earning higher mark-ups than large MFIs. The findings of the study provide crucial insights into the working of MFIs that would help policymakers to take the necessary steps to nurture healthy competition in the microfinance sector. This study is first of its kind which explicitly focuses on the market structure of the Indian microfinance sector.