Microcredit Capital Flows and Interest Rates: An Alternative Explanation
International capital flows are constrained by a lack of complementary human capital, information asymmetries and transaction costs for small loan sizes. Extant research has provided a myriad of economic and cultural explanations of how microcredit has overcome these. Based on these, the paper develops a simple economic framework that accounts for these behavioral and institutional factors: a discontinuous marginal revenue curve and a U-shaped supply curve of capital for the microcredit environment. It then uses these analytical tools to explain capital flows and interest rates charged by traditional moneylenders. Finally, it uses these tools to present the growth of microcredit and the increase in financial flows and to explain why microcredit interest rates are lower than those of moneylenders, but higher than those of commercial banks to wealthier borrowers.
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