Are competitive microfinance services worth regulating? Evidence from microfinance institutions in Sub-Saharan Africa

Abstract

In recent years there is increasing appetite for regulation of microfinance services after the 2008 financial crisis. Policy questions such as whether competitive micro finance 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, is an empirical issue that this paper provide answers based on data on Sub-Saharan Africa (SSA) for the period 1995 to 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 MFI’s in Sub-Sahara Africa. Our findings suggest that MFI industry could be regulated efficiently if policymakers develop policies targeted at reducing credit risk exposures of MFI's than their exposure to operational risk.