What Drives the Microfinance Lending Rate?

Is the microfinance institution (MFI) able to charge unduly high lending rates and obtain a profitability incompatible with perfect competition? We use a global panel data set of MFIs. The Panzar and Rosse revenue test in static and dynamic versions is employed, together with analyses of price (the lending rate) and return on assets. We control for microfinance specific variables such as average loan and institutional background variables, and also perform estimations in sub-samples of ownership types, regulation, and founder type. We find that the average MFI does not enjoy monopoly market power in its market, but cannot reject that perfect competition or monopolistic competition are better descriptions of the MFI's average market type. The conclusions hold up in both static and dynamic regressions, as well as in different sub-samples.