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Stepping Stone: The Logic of Financial Inclusion through Microcredit in Rural China

Nan Zhou (), Wenli Cheng () and Longyao Zhang ()
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Nan Zhou: College of Finance, Nanjing Agricultural University
Longyao Zhang: College of Finance, Nanjing Agricultural University

No 2022-15, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper studies the effect of microcredit on a rural household’s subsequent access to bank loans. Based on a 2018 survey of rural households in 6 Chinese provinces, we find that microcredit served as a stepping stone to bank credit: participation in microcredit improved a household’ probability of obtaining bank loans in the following year by 4.9 percentage points. Notably, the stepping effect was present for both the relatively wealthy households and poor households, if we measure wealth by households’ social capital and assets. We identify two mechanisms behind the stepping stone effect. First, the experience of microcredit instilled confidence in households, which helped to turn their hidden demand for bank credit into effective demand. Second, since microcredit records were included in the National Credit Information System, participation in microcredit in effect enabled households to provide banks with creditable and easily discoverable information about their creditworthiness, which greatly improved their chances of obtaining bank loans.

Keywords: Microcredit; stepping stone effect; credit graduation; financial inclusion (search for similar items in EconPapers)
JEL-codes: G21 O16 (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-ban, nep-cna, nep-fle and nep-mfd
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