Microcredit in Developed Countries: Unexpected Consequences of Loan Ceilings

Anastasia Cozarenco () and Ariane Szafarz

No 14-015, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: In most developed countries, regulators have imposed loan ceilings to subsidized microfinance institutions (MFIs). Micro-entrepreneurs in need of above-ceiling loans are left with the co-financing option, which means securing the aboveceiling share of the loan with a regular bank, and getting a ceiling-high loan from the MFI. Co-financing is attractive to MFIs because it allows them to free-ride on the regular banks' screening process. Therefore, loan ceilings can have the perverse effect of facilitating the co-financing of large projects at the expense of micro-entrepreneurs who need below-ceiling loans only. This is the gist of our theoretical model. We test the predictions of this model by exploiting the natural experiment of a French MFI that became subject to the French EUR 10,000 loan ceiling in April 2009. Difference-in-differences probit estimations confirm that imposing loan ceilings to MFIs can have unexpected and socially harmful consequences.

Keywords: Microcredit; regulation; developed countries; loan size; natural experiment (search for similar items in EconPapers)
JEL-codes: C25 G21 G28 I38 L31 L51 M13 O52 (search for similar items in EconPapers)
Pages: 55 p.
Date: 2014-07-03
New Economics Papers: this item is included in nep-ban, nep-ent, nep-mfd and nep-ppm
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Citations: View citations in EconPapers (8)

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