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The regulation of prosocial lending: Are loan ceilings effective?

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  • Cozarenco, Anastasia
  • Szafarz, Ariane

Abstract

Regulatory loan ceilings are commonly found in the prosocial lending sector, yet they can have unintended perverse effects. By mitigating the risk of adverse selection, loan caps catalyze co-financing arrangements between subsidized lenders and commercial banks. These arrangements can, in turn, crowd out the most vulnerable borrowers, i.e., those typically targeted by regulators. To assess this claim, we proceed in two steps. First, we build a theoretical model. Second, we test it, drawing on a rich hand-collected dataset on the clientele of an unregulated French microcredit provider that turned into a regulated institution—following a shock affecting its funding sources. Using a difference-in-differences linear probability model with propensity score matching, we empirically confirm the theoretical prediction that the imposition of a loan ceiling will lead to mission drift.

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  • Cozarenco, Anastasia & Szafarz, Ariane, 2020. "The regulation of prosocial lending: Are loan ceilings effective?," Journal of Banking & Finance, Elsevier, vol. 121(C).
  • Handle: RePEc:eee:jbfina:v:121:y:2020:i:c:s0378426620302417
    DOI: 10.1016/j.jbankfin.2020.105979
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    More about this item

    Keywords

    Microcredit; Microfinance; Regulation; Loan ceiling; Mission drift; Altruism;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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