Mitigating Loan Repayment Troubles during Microfinance Expansion: Evidence from a Large Panel

Abstract

Using linear panel methods, this article tests whether the surge in microfinance lending during the boom years of 2004-2008 hurt loan repayment rates. Surprisingly, we find evidence that loan delinquency is inversely related to microfinance growth. This result is contrary to the long-standing view that fast microfinance expansion leads to increased loan delinquency. This suggests the existence of a larger pool of high quality borrowers that may have not yet been tapped in new markets. This finding is robust across estimation methods and even after controlling for cross-sectional and temporal dependencies.