Financial Liberalization and the Development of Microcredit

CRENOS working paper series (contributi di ricerca), 2013

29 Pages Posted: 31 Oct 2019 Last revised: 20 Nov 2019

See all articles by Luca Deidda

Luca Deidda

Università degli Studi di Sassari - Department of Economics and Business; Universita di Cagliari - Centre for North South Economic Research (CRENOS)

José J. Cao‐Alvira

affiliation not provided to SSRN

Date Written: 2013

Abstract

We analyze the debt origination process in which a lender offers prospective borrowers a microcredit product alongside a traditional bank loan, and the impact anti-usury mandates can cause within this credit market. This is a paper about the prospects of financial liberalization following a more flexible determination of anti-usury rates and, with it, the development of a formal microcredit market. In the presence of asymmetric information, a lender assesses a borrower's credit worthiness via a screening process, which its effectiveness is negatively affected by the opaqueness of the borrower's financial information. For this economy, an equilibrium is possible where all opaque borrowers, regardless of their true riskiness, are rationed from credit where usury rates are exogenously set too low by regulatory authorities. Were the anti-usury mandate was relaxed, these borrowers would have the option of financing through microcredit.

Keywords: Microcredit, Asymmetric Information, Bank Downscaling, Usury Rates

JEL Classification: O16, G14, G21, G28

Suggested Citation

Deidda, Luca and Cao‐Alvira, José J., Financial Liberalization and the Development of Microcredit (2013). CRENOS working paper series (contributi di ricerca), 2013. Available at SSRN: https://ssrn.com/abstract=3473764 or http://dx.doi.org/10.2139/ssrn.3473764

Luca Deidda (Contact Author)

Università degli Studi di Sassari - Department of Economics and Business ( email )

via Muroni 25
Sassari, Sassari 07100
Italy

Universita di Cagliari - Centre for North South Economic Research (CRENOS) ( email )

Italy

José J. Cao‐Alvira

affiliation not provided to SSRN

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