Discouragement and Micro Credit Rationing: Are Microfinance Institutions a Panacea?

The importance of micro and small businesses in economic development is well recognized. However, these firms tend to suffer from credit rationing and discouragement. In this chapter, we aim to explore the effect of microcredit as small business lending specialization on the problems of credit rationing and discouragement. We use a sample from survey on access to finance of enterprises (SAFE) containing information about micro and small firms for 38 developed and developing European countries between 2008 and 2018. We found that applying for credit on a microfinance institution (MFI) reduces the credit rationing incidence and scale, underlying the assumptions that MFIs improve the financial access to small scale loans, but with an higher cost. Our results also show that borrowers with past relationship lending with microfinance institutions are more discouraged to apply for a new loan, but a deteriorated relationships also increases financial constraints. Post estimations checks provide support for these results.