Expansion and Welfare in Microfinance: A Screening ModelIn Economic Modelling, 53, December 4, 2015, 1-7 (Online Reference: DOI:10.1016/j.econmod.2015.11.012)Viswanath Pingali and Ratul Lahkar
The expansion of microfinance has triggered
concerns of rising indebtedness, and higher default and interest rates. Using a
screening model, we show that even if interest and default rates increase due
to expansion, borrower welfare may improve. This is because: (i) all borrowers
previously denied credit can obtain loans, and (ii) screening costs for
pre-existing borrowers go down. Hence, policies that seek to regulate interest
and screening levels can be counterproductive.