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Microcredit in Developed Countries: Unexpected Consequences of Loan Ceilings

Author

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  • Anastasia Cozarenco
  • Ariane Szafarz

Abstract

In most developed countries, regulators have imposed loan ceilings to subsidized microfinance institutions (MFIs). Micro-entrepreneurs in need of above-ceiling loans are left with the co-financing option, which means securing the aboveceiling share of the loan with a regular bank, and getting a ceiling-high loan from the MFI. Co-financing is attractive to MFIs because it allows them to free-ride on the regular banks' screening process. Therefore, loan ceilings can have the perverse effect of facilitating the co-financing of large projects at the expense of micro-entrepreneurs who need below-ceiling loans only. This is the gist of our theoretical model. We test the predictions of this model by exploiting the natural experiment of a French MFI that became subject to the French EUR 10,000 loan ceiling in April 2009. Difference-in-differences probit estimations confirm that imposing loan ceilings to MFIs can have unexpected and socially harmful consequences.

Suggested Citation

  • Anastasia Cozarenco & Ariane Szafarz, 2014. "Microcredit in Developed Countries: Unexpected Consequences of Loan Ceilings," Working Papers CEB 14-015, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/172183
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    Citations

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    Cited by:

    1. Anastasia Cozarenco & Ariane Szafarz, 2013. "Female Access to Credit in France: How Microfinance Institutions Import Disparate Treatment from Banks," Working Papers halshs-00874448, HAL.
    2. Anastasia Cozarenco & Ariane Szafarz, 2018. "Gender Biases in Bank Lending: Lessons from Microcredit in France," Journal of Business Ethics, Springer, vol. 147(3), pages 631-650, February.
    3. Anastasia Cozarenco, 2015. "Microfinance Institutions and Banks in Europe: The story to date," Working Papers CEB 15-027, ULB -- Universite Libre de Bruxelles.
    4. Anastasia Cozarenco & Ariane Szafarz, 2013. "Women’s Access to Credit in France: How Microfinance Institutions Import Disparate Treatment from Banks," Working Papers CEB 13-037, ULB -- Universite Libre de Bruxelles.

    More about this item

    Keywords

    Microcredit; regulation; developed countries; loan size; natural experiment;

    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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