Competition between microfinance institutions (MFIs) in developing countries has increased dramatically in the last decade. We model the behavior of non-profit lenders, and show that their non-standard, client-maximizing objectives cause them to cross-subsidize within their pool of borrowers. Thus when competition eliminates rents on profitable borrowers, it is likely to yield a new equilibrium in which poor borrowers are worse off. As competition exacerbates asymmetric information problems over borrower indebtedness, the most impatient borrowers begin to obtain multiple loans, creating a negative externality that leads to less favorable equilibrium loan contracts for all borrowers.
Craig McIntosh, Bruce Wydick. Competition and Microfinance. Journal of Development Economics (December 2005), vol. 78, no. 2, pp. 271-298. doi:10.1016/j.jdeveco.2004.11.008