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Financial sector development and microcredit to small firms

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  • Kanga, Désiré
  • Soumare, Issouf
  • Tchuigoua, Hubert Tchakoute

Abstract

This article investigates the relationship between countries’ financial sector development and the loans extended to micro, small, and medium-sized enterprises (MSMEs or small firms) by microfinance institutions (MFIs). Using 4,801 MFI-year observations worldwide, we find a negative relationship between financial sector development and MSME lending by microfinance institutions. In other words, improvement in financial development, defined as a combination of depth, access, and efficiency, decreases micro-lending to small firms due essentially to intense competition from banks. Moreover, looking at the ownership status of microfinance institutions, we find that the intense competition between profit-oriented microfinance institutions and banks mainly drives the observed negative relationship. For nonprofit microfinance institutions, financial sector development is not significantly associated with their lending to small firms. In a less developed financial sector, microfinance institutions lend more to small firms, fulfilling their social mission.

Suggested Citation

  • Kanga, Désiré & Soumare, Issouf & Tchuigoua, Hubert Tchakoute, 2024. "Financial sector development and microcredit to small firms," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 96(C).
    • Handle: RePEc:eee:intfin:v:96:y:2024:i:c:s104244312400129x
    DOI: 10.1016/j.intfin.2024.102063
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    More about this item

    Keywords

    Microfinance; Credit to small and medium-sized enterprises; Credit constraint; Financial sector development;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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