Microcredit in Developed Countries : Unexpected Consequences of Loan-Size Ceilings

In most developed countries, regulators have imposed loan-size ceilings to subsidized microfinance institutions (MFIs). Entrepreneurs holding above-ceiling projects then need to secure partial funding by a bank before applying for microcredit. In turn, the MFI is tempted to free ride on bank screening and serve better-off applicants. We frame this intuition into a theoretical model. Next, we test the theoretical predictions by exploiting a natural experiment provided by a French NGO, which turned itself into a regulated MFI. We investigate the impact of the French EUR 10,000 loan-size ceiling by using difference-in-differences probit estimation. After the change in status, the approval rate rises and the financed projects are significantly larger. Our findings suggest that imposing a low loan-size ceiling to MFIs can have unexpected and socially harmful consequences. An alternative could be to regulate the target pool of borrowers of subsidized MFIs