Multibanking in microfinance yields positive performance: Evidence from Ecuadorian entrepreneurs

Abstract

Is it, on average, harmful for micro-entrepreneurs to borrow from several banks? In this study we find that having loans from several banks improves entrepreneurs' performance, that is, their current revenue. We ensure causal identification by applying instrumental variable estimator to control for the endogeneity as well as test for possible attrition induced bias. Importantly, we uncover certain borrowing patterns of these multiple loans that are associated with greater gross income – specific temporal order of taking out loans and their size relative to incomes. We cannot claim whether this pattern is initiated by the borrower or the banks. The study uses proprietary rich customer data from an Ecuadorian bank matched with credit registry records. Although we acknowledge the many risks involved, our findings suggest a more positive role for multibanking, which has primarily been considered a driver of over-indebtedness in the microfinance literature.