Financial liberalization and the development of microcredit

Jose Cao-Alvira and Luca Deidda

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: We analyze the debt origination process in which a lender offers prospective borrowers a microcredit product alongside a traditional bank loan, and the impact anti-usury mandates can cause within this credit market. This is a paper about the prospects of financial liberalization following a more flexible determination of anti-usury rates and, with it, the development of a formal microcredit market. In the presence of asymmetric information, a lender assesses a borrower's credit worthiness via a screening process, which its effectiveness is negatively affected by the opaqueness of the borrower's financial information. For this economy, an equilibrium is possible where all opaque borrowers, regardless of their true riskiness, are rationed from credit where usury rates are exogenously set too low by regulatory authorities. Were the anti-usury mandate was relaxed, these bor- rowers would have the option of financing through microcredit.

Keywords: Usury Rates; Microcredit; Bank Downscaling; asymmetric information (search for similar items in EconPapers)
JEL-codes: G14 G21 G28 O16 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:201324

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