A study titled “Microfinance Competition in the Presence of Moneylenders: Theory and Evidence” found that the presence of microfinance institutions (MFIs) in rural areas significantly lowers interest rates and reduces reliance on informal moneylenders. On average, a village in Bangladesh has five MFIs or NGOs, and the entry of an additional MFI reduces borrowing from traditional moneylenders (mohajons) by 33% and decreases interest rates by 25%. Despite this, 20-30% of rural borrowers still rely on mohajons, who charge an average interest rate of 145%. The study, based on 150 villages across four districts, highlighted that 50% of rural borrowers take loans from NGOs, but a mismatch between loan disbursement periods and borrower needs often forces them to use moneylenders for emergencies. Experts at a BIDS seminar emphasized the need for improved financial services to further reduce dependence on high-interest informal lending.
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