Serving the Underserved: Microcredit as a Pathway to Commercial Banks

Abstract

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.

Borrowers Strategic Loan Default in Central Bank Microfinance Facilities and Incentives to Repay

“…In another word, the opportunity cost of not repaying the loan is lower than the cost of repaying the loan. This occurred in particular when loans were funded by monetary creation, leading to a massive inaction from both the lender and borrower and thus devaluation of loan repayments (Agarwal et al, 2021).…”