Development of bank microcredit

TitleDevelopment of bank microcredit
Publication TypeJournal Article
Year of Publication2019
AuthorsDeidda, LG, Cao-Alvira, JJ
JournalThe North American Journal of Economics and Finance

We analyze the process by which banks enter the microcredit market while still engaging in traditional credit practices. For this we study a competitive credit market with adverse selection, where lenders are endowed with a screening technology capable of extracting an informative signal about a borrower’s quality if enough time is devoted to process the loan application. The time necessary for signal extraction depends on the borrower’s informational transparency. In the presence of opaque and transparent borrowers, depending on economy parameters, either a separating equilibrium with standard credit or microcredit prevails or a pooling equilibrium with either loan contract prevails.

Keywordsasymmetric information, Bank MFI, Microcredit, Opaqueness, screening