Sumit Agarwal, Thomas Kigabo, Camelia Minoiu, Andrea Presbitero, and Andre Silva
INTERNATIONAL MONETARY FUND
We examine the impact of a large-scale microcredit expansion program on access to finance and the
transition of first-time borrowers from microfinance institutions to the formal banking sector. Using
administrative micro-data covering the universe of loans to individuals from a developing country, we
show that the program significantly increased access to credit, particularly in less developed areas.
This effect is driven by the newly set-up credit cooperatives (U-SACCOs), which grant loans to
previously unbanked individuals. About 10\% of first-time U-SACCO borrowers that need a second
loan switch to the formal banking sector, with commercial banks cream-skimming less risky
borrowers from U-SACCOs and granting them larger, cheaper, and longer-term loans. These
borrowers are not riskier than similar individuals already in the formal banking sector and only
initially receive smaller loans. Our results suggest that the microfinance sector, together with a well functioning
credit reference bureau, help mitigate information frictions in credit markets.