Center for Effective Global Action

We provide evidence on why large financial institutions in developing economies have had difficulties expanding formal sector credit. Using detailed credit data and a product that accounted for 15% of all first-time formal loans, we show that borrowers new to formal credit default at high rates and generate ex-ante unpredictable revenue. Using a large country-wide experiment, we show that expost contract terms do little to mitigate risk, implying moral hazard is not a primary cause of default. Failing to make its flagship financial inclusion product profitable, the bank eventually discontinued it