Credit Market Structure and Interest Rates: An Approach to the Microfinance Segment

This article examines the structure of the credit market in Peru’s microfinance sector, with the aim of determining the degree of market power that lenders exercise in setting interest rates. Using a model based on the optimization of a representative bank’s profit function, a panel data methodology is applied to analyze quarterly data from 1998 to 2002. The results indicate that institutions in the microfinance segment possess significant market power, which allows them to set interest rates higher than those in a perfectly competitive market, resulting in high profit margins. In contrast, the corporate segment is closer to a competitive equilibrium, with less bargaining power and interest rates that reflect conditions more in line with perfect competition. These findings suggest that policy interventions to increase competition in microfinance could facilitate better monetary policy transmission and greater efficiency in the credit market. (Abstract and audio: Department of Economic Publications)