| Abstract: |
We examine the impact of a large-scale microcredit expansion program on access
to finance and the transition of first-time borrowers from microfinance
institutions to the formal banking sector. Using administrative micro-data
covering the universe of loans to individuals from a developing country, we
show that the program significantly increased access to credit, particularly
in less developed areas. This effect is driven by the newly set-up credit
cooperatives (U-SACCOs), which grant loans to previously unbanked individuals.
About 10\% of first-time U-SACCO borrowers that need a second loan switch to
the formal banking sector, with commercial banks cream-skimming less risky
borrowers from U-SACCOs and granting them larger, cheaper, and longer-term
loans. These borrowers are not riskier than similar individuals already in the
formal banking sector and only initially receive smaller loans. Our results
suggest that the microfinance sector, together with a well functioning credit
reference bureau, help mitigate information frictions in credit markets. |