In a competitive setup, by definition, many firms contend for a limited market share. In the financial sector, in particular, competition greatly affects consumers’ wealth and financial soundness of banks (Bikker and Bos, 2005). The competition also affects the quality and diversity of products and productive efficiency of financial institutions (Claessens and Laeven, 2005). In the globalized microfinance industry, where competition has become increasingly severe, especially among the MFIs in Tanzania and East Africa at large.
One would expect competition helps to increase clients’ access to credit and lower interest rates. However, since MFIs fundamentally operate on a double bottom line principle, increased competition exacerbates the moral hazard and the information asymmetry problems in the industry.
Two fairly opposing views shed light on how competition affects the stability of financial institutions. The traditional ‘competition-fragility’ view argues that increased competition in banks erodes market power, decreases profit margins and results in their reduced franchise value which encourages them to take on more risks to increase returns. Empirically, this implies that more competition is linked with a higher risk loan portfolio measured by non-performing loans. Contrary to this, the ‘competition-stability’ view suggests that increased market power in the loan market may result in higher bank risk due to the increased interest rates charged to the clients, make loan repayment harder and exacerbate moral hazard incentives of borrowers. This may result in a shift towards risky borrowers due to adverse selection problems. Generally, both views imply that increased competition among the financial service providers may deteriorate loan portfolio quality and reduce MFIs’ financial performance.
However, the overall effects of competition and market power on financial institutions’ stability are not very straightforward and their risk may not increase due to risks in loan portfolios. Financial institutions may protect themselves from higher loan risk for instance, through more equity capital or other techniques that mitigate loan risks.
As a result, it appears that technological innovation is largely used by the banking sector to create competitive intelligence and competitive advantage because it helps financial institutions to improve their services and their cost-efficiency since most of their operations are automated by technological systems that make it easy for the MFI’s to run their business and eventually realize their profit in the business.
Amala Core Banking is the system that is intended to solve the problems of the microfinance in Tanzania with a premium FinTech solution and through it making it simple to operate. With this system, the microfinance institutions will be able to manage their loans, clients, savings and shares for the institutions and integrate all activities within one system that is accurate, effective, reliable, cost-effective and above all user friendly. The dedication is beyond customer expectations driven to make sure that our customers add value to their business.
