Serving the Underserved: Microcredit as a Pathway to Commercial Banks

79 Pages Posted: 7 Oct 2018 Last revised: 1 Apr 2021

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Thomas Kigabo

National Bank of Rwanda

Camelia Minoiu

Board of Governors of the Federal Reserve System

Andrea Presbitero

Johns Hopkins University

André F. Silva

Board of Governors of the Federal Reserve System

Multiple version iconThere are 4 versions of this paper

Date Written: March 31, 2021

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 data on the universe of loans from a credit register accessible to all lenders, we show that the program improved access to credit, especially in underdeveloped areas, and reduced poverty. The program also generated positive spillovers to the commercial banking sector: a sizable share of first-time borrowers switched to banks, which cream-skim less risky borrowers and grant them larger, cheaper, and longer maturity loans. Switchers have lower default risk than non-switchers and are not riskier than other bank borrowers. Switchers also obtain better loan terms from banks compared to first-time bank borrowers without a credit history. Overall, our results suggest that the microfinance sector - in the presence of a credit reference bureau accessible to all lenders - can play a critical role in screening unbanked borrowers, allowing them to build a credit history and facilitating their transition to commercial banks.

Keywords: Access to credit, microfinance, unbanked, credit bureau, bank loans

JEL Classification: G21, O12, O55

Suggested Citation

Agarwal, Sumit and Kigabo, Thomas and Minoiu, Camelia and Presbitero, Andrea and Silva, André F., Serving the Underserved: Microcredit as a Pathway to Commercial Banks (March 31, 2021). Available at SSRN: https://ssrn.com/abstract=3247796 or http://dx.doi.org/10.2139/ssrn.3247796

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Thomas Kigabo

National Bank of Rwanda ( email )

Rwanda

Camelia Minoiu (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andrea Presbitero

Johns Hopkins University ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

HOME PAGE: http://https://sites.google.com/site/presbitero/

André F. Silva

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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