Are competitive microfinance services worth regulating? Evidence from microfinance institutions in Sub‐Saharan Africa
Date
2019-11-26
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
International Journal of Finance and Economics
Abstract
In recent years, there is increasing appetite for regulation of microfinance services
after the 2008 financial crisis. Policy questions such as whether competitive
microfinance institution (MFI) requires strong regulation to reduce, for example,
credit risk or competition and regulation operate in the opposite direction,
which each tends to dampen the effect of the other, are an empirical issue that
this paper provides answers based on data on Sub-Saharan Africa (SSA) for the
period 1995–2015, utilizing panel data approaches. Finding from the study indicates
that low competition increases credit risk among MFIs in SSA, which regulation
helps reduce such behaviour. The effect of regulation on credit risk is
conditional on the level of competition, at the first percentile of competition
(imply more competition); regulation does not reduce credit risk behaviour of
MFIs but does at competition level above the 25th percentile (imply less competition).
Regulation, on the other hand, does not affect operational risk at any
level of competition. These findings have implications for policy formulation on
the regulation and operations of MFIs in SSA. Our findings suggest that the MFI
industry could be regulated efficiently if policymakers develop policies targeted
at reducing credit risk exposures of MFIs than their exposure to operational risk.
Description
Research Article
Keywords
Competition, financial services, microfinance, portfolio risk
Citation
Karimu A, Salia S, Hussain JG, Tingbani I. Are competitive microfinance services worth regulating? Evidence from microfinance institutions in Sub-Saharan Africa. Int J Fin Econ. 2019;1–17. https://doi.org/ 10.1002/ijfe.1800