Financial Access Under the Microscope

Abstract

We examine the impact of a large-scale microcredit expansion program on financial access and the transition of previously unbanked borrowers to commercial banks. Using administrative micro-data covering the universe of loans to individuals from a developing country, we show that the program significantly increased access to credit, particularly in less developed areas. This effect is driven by the newly setup credit cooperatives (U-SACCOs), which grant loans to previously unbanked individuals. A sizable share of first-time borrowers who need a second loan switch to commercial banks, which cream-skim low-risk borrowers and grant them larger, cheaper, and longer-term loans. These borrowers are not riskier than similar individuals already at commercial banks and only initially receive smaller loans. Our results suggest that the microfinance sector, together with a wellfunctioning credit reference bureau, help mitigate information frictions in credit markets..

Financial Inclusion: What Have We Learned So Far? What Do We Have to Learn?

“…De Janvry, McIntosh, and Sadoulet (2019) document that the use of credit bureau services by a microfinance lender in Guatemala improved screening of new clients, increased the size of loans, but also led to an increase of expulsion of existing clients. Agarwal et al (2018) showed that a microcredit program coupled with a well-functioning credit bureau in Rwanda improved individuals' access to commercial bank loans at favorable conditions.…”

Drivers of Financial Access

“…It is therefore not surprising that government interventions aimed at increasing access to cheaper credit have not resulted in lower use of informal finance (Gine, 2011). Nonetheless, Agarwal et al (2018) document how government-sponsored credit cooperatives in Tanzania, together with a functioning credit bureau, helped increase formal credit, though they also find that more formal financial institutions tend to cream-skim borrowers.…”