The regulation of prosocial lending: Are loan ceilings effective?

Anastasia Cozarenco and Ariane Szafarz

Journal of Banking & Finance, 2020, vol. 121, issue C

Abstract: Regulatory loan ceilings are commonly found in the prosocial lending sector, yet they can have unintended perverse effects. By mitigating the risk of adverse selection, loan caps catalyze co-financing arrangements between subsidized lenders and commercial banks. These arrangements can, in turn, crowd out the most vulnerable borrowers, i.e., those typically targeted by regulators. To assess this claim, we proceed in two steps. First, we build a theoretical model. Second, we test it, drawing on a rich hand-collected dataset on the clientele of an unregulated French microcredit provider that turned into a regulated institution—following a shock affecting its funding sources. Using a difference-in-differences linear probability model with propensity score matching, we empirically confirm the theoretical prediction that the imposition of a loan ceiling will lead to mission drift.

Keywords: Microcredit; Microfinance; Regulation; Loan ceiling; Mission drift; Altruism (search for similar items in EconPapers)
JEL-codes: C25 G21 G28 I38 L31 L51 M13 O52 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: The Regulation of Prosocial Lending: Are Loan Ceilings Effective? (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:121:y:2020:i:c:s0378426620302417

DOI: 10.1016/j.jbankfin.2020.105979

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