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Microcredit in Developed Countries: Unexpected Consequences of Loan-Size Ceilings

Publication Papers

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 above-ceiling 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 microentrepreneurs 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.