Open AccessServing the Underserved: Microcredit as a Pathway to Commercial Banks
Author(s) -
Sumit Agarwal,
Thomas Kigabo,
Camelia Minoiu,
Andrea F. Presbitero,
André F. Silva
Publication year - 2021
Publication title -
finance and economics discussion series
Language(s) - English
Resource type - Journals
eISSN - 2767-3898
pISSN - 1936-2854
DOI - 10.17016/feds.2021.041
Subject(s) - loan , business , financial system , unbanked , maturity (psychological) , microfinance , default , poverty , financial services , finance , economics , economic growth , financial inclusion , psychology , developmental psychology
A large-scale microcredit expansion program—together with a credit bureau accessible to all lenders—can enable unbanked borrowers to build a credit history, facilitating their transition to commercial banks. Loan-level data from Rwanda show the program improved access to credit and reduced poverty. A sizable share of first-time borrowers switched to commercial 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 with first-time bank borrowers without a credit history.