Financial sector development and microcredit to small firms

Désiré Kanga, Issouf Soumare and Hubert Tchakoute Tchuigoua

Journal of International Financial Markets, Institutions and Money, 2024, vol. 96, issue C

Abstract: This article investigates the relationship between countries’ financial sector development and the loans extended to micro, small, and medium-sized enterprises (MSMEs or small firms) by microfinance institutions (MFIs). Using 4,801 MFI-year observations worldwide, we find a negative relationship between financial sector development and MSME lending by microfinance institutions. In other words, improvement in financial development, defined as a combination of depth, access, and efficiency, decreases micro-lending to small firms due essentially to intense competition from banks. Moreover, looking at the ownership status of microfinance institutions, we find that the intense competition between profit-oriented microfinance institutions and banks mainly drives the observed negative relationship. For nonprofit microfinance institutions, financial sector development is not significantly associated with their lending to small firms. In a less developed financial sector, microfinance institutions lend more to small firms, fulfilling their social mission.

Keywords: Microfinance; Credit to small and medium-sized enterprises; Credit constraint; Financial sector development (search for similar items in EconPapers)
JEL-codes: G21 G23 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:96:y:2024:i:c:s104244312400129x

DOI: 10.1016/j.intfin.2024.102063

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