Microcredit and Survival Microenterprises: The Role of Market Structure

Poverty remains a pervasive problem all over the world, but the problem is worst in underdeveloped areas like Africa. While microfinance is supposed to address this problem through the promotion of viable businesses, it has not been very successful in helping survival microenterprises, i.e., businesses that the very poor with limited human capital have access to, in sectors with low barriers to entry and selling undifferentiated products. In this paper, I examine the role of market structure in mediating the impact of micro-lending to such survival enterprises. While there have been many evaluations of microfinance institutions (MFIs), there have been very few that look at market conditions as an input into the success of micro-lending. My theoretical analysis suggests that when introducing an extensive program of microcredit in undeveloped and relatively isolated rural areas, it is important to look at how the market structure mediates the impact of the provision of loans on the demand and supply for the end-product or service. I present some empirical evidence, which provides partial confirmation that MFIs are not currently taking these considerations into account.