Discussion Paper Details

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Title: Serving the Underserved: Microcredit as a Pathway to Commercial Banks

Author(s): Sumit Agarwal, Thomas Kigabo, Camelia Minoiu, Andrea Presbitero and André F Silva

Publication Date: April 2021

Keyword(s): Access to credit, bank loans, Credit bureau, Microfinance and Unbanked

Programme Area(s): Development Economics and Financial Economics

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

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Bibliographic Reference

Agarwal, S, Kigabo, T, Minoiu, C, Presbitero, A and Silva, A. 2021. 'Serving the Underserved: Microcredit as a Pathway to Commercial Banks'. London, Centre for Economic Policy Research.