Financial Access Under the Microscope

IMF Working Papers, September 28, 2018

Source details

Canonical URL

Financial Access Under the Microscope

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Sumit Agarwal, Thomas Kigabo, Camelia Minoiu, Andrea F Presbitero, Andre Silva
• Published: September 28, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484376362.001

Summary

• Study examines impact of a large-scale microcredit expansion program on financial access and transition of previously unbanked borrowers to commercial banks.
• Uses administrative micro-data covering the universe of loans to individuals from a developing country.
• Main finding: the program significantly increased access to credit, particularly in less developed areas.
• Effect driven by newly set-up 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.
• Commercial banks "cream-skim" low-risk borrowers and grant them larger, cheaper, and longer-term loans.
• First-time borrowers who switch are not riskier than similar individuals already at commercial banks and only initially receive smaller loans.
• Conclusion: the microfinance sector, together with a well-functioning credit reference bureau, help mitigate information frictions in credit markets.

Key Findings and Evidence

• Program outcome: significant increase in access to credit, with stronger effects in less developed areas.
• Channel: newly established U-SACCOs extend credit to previously unbanked individuals.
• Borrower transition: notable movement of first-time borrowers to commercial banks when seeking subsequent loans.
• Commercial banks’ behavior: select low-risk borrowers ("cream-skim") and offer larger, cheaper, and longer-term loans compared with initial microcredit.
• Risk assessment: borrowers switching to commercial banks are not riskier than incumbents at commercial banks; their initial loans from microcredit providers are smaller.

Policy Implications

• Microfinance expansion can expand credit access, especially in underdeveloped regions.
• Newly formed credit cooperatives (U-SACCOs) play a critical role in onboarding previously unbanked individuals.
• Well-functioning credit reference bureaus complement microfinance by reducing information frictions and facilitating transitions to commercial banking.
• Commercial banks’ ability to cream-skim low-risk borrowers suggests the importance of monitoring borrower selection and ensuring broader access to credit terms over time.

Content in this bundle

• Financial Inclusion Under the Microscope, WP/18/208, September 2018
  • Financial Inclusion Under the Microscope, WP/18/208, September 2018 (Markdown version)
  • Financial Inclusion Under the Microscope, WP/18/208, September 2018 (PDF)