Small Business Economics

, Volume 43, Issue 4, pp 931–944 | Cite as

State intervention and the microcredit market: the role of business development services

Article

Abstract

We analyze in this paper how various forms of state intervention can impact microfinance institutions’ lending behavior. Using a simple model where entrepreneurs receive individual uncollateralized loans, we show that, not surprisingly, state intervention through the loan guarantee increases the number of entrepreneurs receiving a loan. However, after modeling business development services (BDS) provided by the microfinance institution, we show that the loan guarantee can have a counterproductive effect by reducing the number of entrepreneurs benefiting from such services. We therefore analyze an alternative policy: BDS subsidization. We show that if BDS are efficient enough and are targeted toward less performing borrowers, then—for fixed government expenditures—such subsidies do better in terms of financial inclusion than the loan guarantee. Moreover, we argue that—under similar conditions—BDS subsidization alone does better in terms of financial inclusion than a mix of policies.

Keywords

Microcredit Loan guarantee Business development services Microfinance institution 

JEL Classifications

D82 G20 G21 G28 H21 L26 

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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Ecole Centrale Marseille (Aix-Marseille School of Economics), CNRS and EHESSMarseilleFrance
  2. 2.Aix-Marseille University (Aix-Marseille School of Economics), CNRS and EHESSMarseille Cedex 02France

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