Proximity‐based screening tools and credit rationing: Lessons from a Cameroonian greenfield microfinance institution

The link between relationship‐based lending and credit availability has been extensively studied in the banking sector. However, in the context of microfinance, academic evidence of the benefits of proximity‐based lending methodologies for borrowers is scarce. The existing literature stresses only the benefits for microlenders and the effect on loan repayment performance. Therefore, this study investigates whether proximity‐based lending—joint liability contracts (group lending) and relationship‐based lending (relationship intensity, multiple‐borrowing, and proximity)—improves credit availability and therefore curbs credit rationing. Since loans are processed by loan officers, the benefit of applying proximity screening tools likely depends on loan officer characteristics, especially gender. To achieve our objective, we use a unique loan‐level dataset of over 5500 loans approved between 2007 and 2012 by a Cameroonian greenfield microfinance institution and estimate a pooled OLS regression after controlling for borrowers’ characteristics, year and industry fixed effects. The findings suggest that proximity‐based lending methodologies limit credit rationing especially by male loan officers, and that multi‐relationship borrowers tend to be more credit rationed. Our findings also suggest that both types of proximity‐based lending are complementary. Finally, our results are less sensitive to a change in the credit rationing measurement.