The global financial crisis provides a sharp reminder of how weak lending practices not only affect the lives of many people but also can have severe systemic consequences.  However, policies designed to protect may unintentionally restrict the extension of credit, especially to poorer borrowers.  

While the financial crisis provides evidence of the need for greater consumer protection, adding costs and complexity to credit processes may slow renewed formal lending.  Confronted by these growing pressures at a macro-economic level, policy makers and regulators face a “regulator’s dilemma”: how much and how to intervene in credit markets to protect not only those borrowers who already have access to formal credit, but also to protect access to credit itself. At the heart of successfully resolving this dilemma, as in all such dilemmas, is the process of carefully identifying and evaluating the trade-offs involved.

The FAI Policy Note “Consumer Protection in Credit Markets” advocates an evidence-based approach and provides pointers to help policy makers establish a regime of consumer protection appropriate to the state of development of different credit markets and in line with broader national objectives such as financial inclusion.

Using two new datasets, the authors examine whether the presence of banks affects the profitability and outreach of microfinance institutions. They find evidence that competition matters.  Greater bank penetration in the overall economy is associated with microbanks pushing toward poorer markets, as reflected in smaller average loans sizes and greater outreach to women. The evidence is particularly strong for microbanks relying on commercial-funding and using traditional bilateral lending contracts (rather than group lending methods favored by microfinance NGOs).  The authors consider plausible alternative explanations for the correlations, including relationships that run through the nature of the regulatory environment and the structure of the banking environment, but fail to find strong support for these alternative hypotheses.

This note reviews innovations in the provision of credit.

This note reviews ideas and evidence about expanding access to saving products.

Foreword to The Pledge: ASA, Peasant Politics, and Microfinance in the Development of Bangladesh, by Stuart Rutherford

Examines the design of formal savings products to promote commitment amongst customers.