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Financial liberalization and the development of microcredit

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Abstract

We analyze the debt origination process in which a lender offers prospective borrowers a microcredit product alongside a traditional bank loan, and the impact anti-usury mandates can cause within this credit market. This is a paper about the prospects of financial liberalization following a more flexible determination of anti-usury rates and, with it, the development of a formal microcredit market. In the presence of asymmetric information, a lender assesses a borrower's credit worthiness via a screening process, which its effectiveness is negatively affected by the opaqueness of the borrower's financial information. For this economy, an equilibrium is possible where all opaque borrowers, regardless of their true riskiness, are rationed from credit where usury rates are exogenously set too low by regulatory authorities. Were the anti-usury mandate was relaxed, these bor- rowers would have the option of financing through microcredit.

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  • JJ. Cao-Alvira & LG Deidda, 2013. "Financial liberalization and the development of microcredit," Working Paper CRENoS 201324, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    • Handle: RePEc:cns:cnscwp:201324
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    More about this item

    Keywords

    Usury Rates; Microcredit; Bank Downscaling; asymmetric information;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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