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Unintended consequences of microfinance: Effects on credit access for small‐ and medium‐sized enterprises

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  • Christoph Sommer

Abstract

While competition in the financial system generally mitigates small‐ and medium‐sized enterprises' (SMEs) financing constraints, this paper theorises that competition by microfinance institutions (MFIs) has adverse effects through aggravating the ‘graduation problem’: Small firms outgrowing microfinance struggle to find financing as conventional financial institutions abstain from downscaling and developing suitable lending instruments for smaller firms if these market segments are narrowed down by upscaling MFIs. Using data from 51 countries between 2002 and 2015, microfinance is found to significantly lower SMEs' access to credit. Credit bureaus can reverse this effect indicating that credit information infrastructure can reconcile a strong microfinance sector with functioning SME finance.

Suggested Citation

  • Christoph Sommer, 2022. "Unintended consequences of microfinance: Effects on credit access for small‐ and medium‐sized enterprises," Journal of International Development, John Wiley & Sons, Ltd., vol. 34(3), pages 564-586, April.
    • Handle: RePEc:wly:jintdv:v:34:y:2022:i:3:p:564-586
    DOI: 10.1002/jid.3614
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