Franchising Microfinance

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Executive Summary

Financial intermediaries worldwide are seeking mechanisms for participating in micro lending. Using informed "Local capitalists" as bank's on-lenders fails due to borrowers' incentive to default with multiple credit sources. A coalition of local capitalists may not resolve the problem in the presence of a monopoly moneylender with superior skills in lending and enforcement. A credible competitive threat to the moneylender can only arise if the local capitalist coalition also provides information sharing benefits that lower their cost of lending vis-?-vis the moneylender. Franchising allows local capitalists to form such a coalition. The conditions were analyzed under which welfare-enhancing franchising would obtain.

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