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The Regulation of Prosocial Lending: Are Loan Ceilings Effective?

Anastasia Cozarenco and Ariane Szafarz

No 20-012, Working Papers CEB from ULB -- Universite Libre de Bruxelles

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 missiondrift.

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: 2020-11-10
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-mfd and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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