State intervention and the microcredit market: the role of business development services
Abstract
We analyze in this paper how various forms of state intervention can impact microfinance institutions’ lending behavior. Using a simple model where entrepreneurs receive individual uncollateralized loans, we show that, not surprisingly, state intervention through the loan guarantee increases the number of entrepreneurs receiving a loan. However, after modeling business development services (BDS) provided by the microfinance institution, we show that the loan guarantee can have a counterproductive effect by reducing the number of entrepreneurs benefiting from such services. We therefore analyze an alternative policy: BDS subsidization. We show that if BDS are efficient enough and are targeted toward less performing borrowers, then-for fixed government expenditures-such subsidies do better in terms of financial inclusion than the loan guarantee. Moreover, we argue that-under similar conditions-BDS subsidization alone does better in terms of financial inclusion than a mix of policies. Copyright Springer Science+Business Media New York 2014