Serving the Underserved: Microcredit as a Pathway to Commercial Banks

RePEc Short ID: ppr57
ORCID iD: 0000-0003-4622-941X

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

doi:10.17016/FEDS.2021.041

Working Paper

Serving the Underserved: Microcredit as a Pathway to Commercial Banks

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.

Keywords: Access to credit; Microfinance; Unbanked; credit bureaus; Bank loans;

JEL Classification: G21; O12; O55;

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