Foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals: the entrant uses collateral as a screening device to contest the incumbent's informational advantage. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. The entrant's success in gaining borrowers of higher quality by o¤ering cheaper loans increases with its e¢ ciency (cost) advantage. This paper accounts for evidence suggesting that foreign banks tend to lend more to large …rms thereby neglecting small and medium enterprises. The results also explain why this observed "bias" is stronger in emerging markets.

The Nobel Prize committee awarded the 2006 Nobel Peace Prize to Muhammad Yunus and the Grameen Bank "for their efforts to create economic and social development from below." The microfinance revolution has come a long way since Yunus first provided financing to the poor in Bangladesh. The committee has recognized microfinance as "an important liberating force" and an "ever more important instrument in the struggle against poverty." Although several authors have provided comprehensive surveys of microfinance, our aim is somewhat more modest: This article is intended as a non-technical overview on the growth and development of microcredit and microfinance. (JEL I3, J41, N80)

Foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals: the entrant uses collateral as a screening device to contest the incumbent's informational advantage. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. The entrant's success in gaining borrowers of higher quality by o¤ering cheaper loans increases with its e¢ ciency (cost) advantage. This paper accounts for evidence suggesting that foreign banks tend to lend more to large …rms thereby neglecting small and medium enterprises. The results also explain why this observed "bias" is stronger in emerging markets.

Foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals: the entrant uses collateral as a screening device to contest the incumbent's informational advantage. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. The entrant's success in gaining borrowers of higher quality by o¤ering cheaper loans increases with its e¢ ciency (cost) advantage. This paper accounts for evidence suggesting that foreign banks tend to lend more to large …rms thereby neglecting small and medium enterprises. The results also explain why this observed "bias" is stronger in emerging markets.

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