New Working Paper by Anastasia Cozarenco and SOCENT professor Ariane Szafarz available on-line
CERMi-CEB working paper WP 14-015, entitled "Microcredit in Developed Countries: Unexpected Consequences of Loan Ceilings", is now available on-line (click on the title to access the paper). The authors of this paper, Anastasia Cozarenco (Aix-Marseille School of Economics) and SOCENT professor Ariane Szafarz (ULB, Centre Emile Bernheim and CERMi), are the winners of the 2014 European Microcredit Research Award, co-sponsored by the European Microfinance Network and the Hague University of Applied Sciences.
In most developed countries, regulators have imposed loan ceilings on 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 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.