Microcredit in Developed Countries: Unexpected Consequences of Loan-Size Ceilings

36 Pages Posted: 1 Jun 2013

See all articles by Anastasia Cozarenco

Anastasia Cozarenco

Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi

Date Written: May 23, 2013

Abstract

In most developed countries, regulators have imposed loan-size ceilings to subsidized microfinance institutions (MFIs). Entrepreneurs holding above-ceiling projects then need to secure partial funding by a bank before applying for microcredit. In turn, the MFI is tempted to free ride on bank screening and serve better-off applicants. We frame this intuition into a theoretical model. Next, we test the theoretical predictions by exploiting a natural experiment provided by a French NGO, which turned itself into a regulated MFI. We investigate the impact of the French EUR 10,000 loan-size ceiling by using difference-in-differences probit estimation. After the change in status, the approval rate rises and the financed projects are significantly larger. Our findings suggest that imposing a low loan-size ceiling to MFIs can have unexpected and socially harmful consequences. An alternative could be to regulate the target pool of borrowers of subsidized MFIs.

Keywords: Microcredit, regulation, developed countries, loan size, natural experiment

JEL Classification: G21, L51, G28, O52, L31, I38, C25

Suggested Citation

Cozarenco, Anastasia and Szafarz, Ariane, Microcredit in Developed Countries: Unexpected Consequences of Loan-Size Ceilings (May 23, 2013). Available at SSRN: https://ssrn.com/abstract=2269022 or http://dx.doi.org/10.2139/ssrn.2269022

Anastasia Cozarenco (Contact Author)

Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS ( email )

Centre de la Vieille Charité
2 rue de la Charité
Marseille, 13236
France

Ariane Szafarz

Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB) & CERMi ( email )

50 Avenue Roosevelt
Brussels 1050
Belgium

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