July 2021

Serving the Underserved: Microcredit as a Pathway to Commercial Banks

Sumit Agarwal, Thomas Kigabo, Camelia Minoiu, Andrea F. Presbitero, André F Silva

Abstract:

A large-scale microcredit expansion program—together with a credit bureau accessible to all lenders—can enable unbanked borrowers to build a credit history, facilitating their transition to commercial banks. Loan-level data from Rwanda show the program improved access to credit and reduced poverty. A sizable share of first-time borrowers switched to commercial banks, which cream-skim less risky borrowers and grant them larger, cheaper, and longer-maturity loans. Switchers have lower default risk than non-switchers and are not riskier than other bank borrowers. Switchers also obtain better loan terms from banks compared with first-time bank borrowers without a credit history.

DOI: https://doi.org/10.17016/FEDS.2021.041

PDF: Full Paper

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Last Update: July 15, 2021