Determinants of Market Power in the Peruvian Regulated Microfinance Sector
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Determinants of Market Power in the Peruvian Regulated Microfinance Sector Giovanna Aguilar 1
& Jhonatan Portilla
1
Received: 31 January 2019 / Revised: 13 August 2019 Accepted: 5 September 2019 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract
The objective of this study is to analyze the evolution and determinants of market power in Peru’s regulated microfinance sector during the period of January 2003 to June 2016. We estimate both a conventional Lerner index (LICON) and an efficiency-adjusted Lerner index (LIADJ) using information from a wide panel of microfinance institutions (MFIs), thus finding that the LIADJ is significantly greater than the LICON. This result confirms that not considering MFIs’ inefficiency leads to an underestimation of their market power. Both indices decreased until 2014, which indicates that regulated MFIs’ market power decreased significantly for more than a decade. Beginning in 2015, market power significantly grew; the largest entities as well as those with the highest efficiency have greater market power. This last result evidences the fulfillment of the efficient structure (ES) hypothesis. In addition, a less elastic demand for microcredit, a lower default risk, as well as the processes of mergers, takeovers, and changes in the business structure of some MFIs, increase market power. Finally, the MFIs that operate in localized areas exhibit greater market power. Keywords Microfinance . Competition . Lerner index . Market power JEL Classification G21 . L11
1 Introduction Microfinance’s remarkable expansion over the last three decades has demonstrated its ability to offer financial services (mainly credits) to segments of the population that find themselves in situations of poverty and vulnerability, thus allowing that these individuals access the formal
* Giovanna Aguilar [email protected]
1
Department of Economics, Pontificia Universidad Católica del Perú, Av. Universitaria 1801, Lima, Peru
Journal of Industry, Competition and Trade
financial system (Reed 2015). This expansion has been characterized by the greater market orientation of and greater competition between microfinance institutions (MFIs) (Assefa et al. 2013; Hermes and Hudon 2018; Hermes and Lensink 2007; Mader and Morvant-Roux 2019; Sabin 2015). In this context, increasing academic interest in studying competition in the microfinance industry has resulted in the development of a broad range of literature on the subject. Via different indicators, Kar (2016) and Kar and Swain (2018a) evaluate the level of competition within microfinance markets in various countries. The papers of Assefa et al. (2013), Kar and Swain (2014, 2018b), and Olivares-Polanco (2005) analyze competition’s effect on MFIs’ social and financial performance. McIntosh et al. (2005) as well as McIntosh and Wydick (2005) demonstrate how increased competition generates clients’ overindebtedness and reduces the chances that MFIs will cross-subsidize between more and less profitable clients. In addition, Baquero et
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