State Intervention and the (Micro) Credit Market in Developed Countries: Loan Guarantee and Business Development Services

This paper presents an analysis of the impact on the microcredit market due to various forms of State intervention in developed countries. It studies the effect of different policies on MFIs' lending behavior, effect of government loan guarantees, and an analysis of an alternative policy: the subsidization of business development services by the State. The paper also attempts to compare the various public subsidies provided by the State. Key findings include:

• Microcredit in the developed countries mainly takes the form of individual loans;
• Microcredit in this scenario is often categorized by two important features which are forms of government support: loan guarantee and business development services;
• Applying a standard economic model to the microcredit market, it was observed that the state guarantee can be counterproductive in terms of the number of entrepreneurs financed due to the business development services;
• Studying an alternative policy, it was observed that if the aim of the government is to crowd-in more borrowers on the credit market, subsidizing business development services would be more effective than the loan guarantee.