Financial Access Under the Microscope

We examine the impact of a large-scale microcredit expansion program on financial access and the transition of previously unbanked borrowers to commercial banks. Using administrative micro-data covering the universe of loans to individuals from a developing country, we show that the program significantly increased access to credit, particularly in less developed areas. This effect is driven by the newly set-up credit cooperatives (U-SACCOs), which grant loans to previously unbanked individuals. A sizable share of first-time borrowers who need a second loan switch to commercial banks, which cream-skim low-risk borrowers and grant them larger, cheaper, and longer-term loans. These borrowers are not riskier than similar individuals already at commercial banks and only initially receive smaller loans. Our results suggest that the microfinance sector, together with a well-functioning credit reference bureau, help mitigate information frictions in credit markets.

Agarwal, Sumit and Kigabo, Thomas and Minoiu, Camelia and Presbitero, Andrea and Silva, André F., Financial Access Under the Microscope (September 2018). IMF Working Paper No. 18/208, Available at SSRN: https://ssrn.com/abstract=3285214