While everyone emphasizes the importance of outreach in microfinance, they often overlook the negative implications of excess supply of microcredit. Economic theory suggests markets work best if demand and supply are matched, and when there is a shortage or excess of either force, sellers may be left with unsold stock, or buyers may be left with unmet demand.

For micro-institutions (say, fishing) to grow at a healthy rate, there needs to be excess demand for the product (say, dried fish). One or two fisheries may be sufficient to serve a community, but easy access to credit may encourage several people to setup fish selling businesses in one area (assume this is a coastal city with plenty of fish in the ocean). Suddenly, there are 5 or 6 shops selling the same thing (dried fish) that nobody wants anymore (after all, there is only so much fish one can eat).

As a result, market growth may stagnate, micro-enterprises may have to diversify their product line (not always an easy task), some businesses may shut down and clients may not be able to pay back their microloans.

The positive side to this is that it will teach micro-entrepreneurs to operate and survive in the capitalist economy. As for clients who cannot adapt competitively to their environment, microfinance institutions can train them to enter other lines of work (a rather costly solution).

Read the Kiva Blog for a detailed account of the complexities of over-supply of microcredit, and about various challenges microfinance institutions face.