Subjectivity in Credit Allocation to Microentrepreneurs: Evidence From Brazil

Are loan officers biased in granting loans?
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This paper empirically estimates the impact of loan officers' subjectivity on microcredit granting.

The peculiarities of its lending methodology expose the microfinance sector to a principal-agent problem. This translates into an unchallenged dominance of loan officers in decision making. Loan officers collect field data, meet applicants and make recommendations to the credit committee that has the final say on loan approval and loan size. The study uses data from a Brazilian MFI. It captures loan officers' subjectivity through the lens of disparate treatment based on gender. The study reveals that:

  • Unfair gender gap exists in loan size, with women clients receiving smaller loans than male clients;
  • This gap is almost exclusively attributable to loan officers;
  • Credit committee marginally contributes to gender gap in loan size;
  • Loan officers let their subjective preferences interfere with loan granting, despite monitoring and wage incentives.

The paper concludes by suggesting means to curb subjectivity in credit allocation to microentrepreneurs. These include donor influence, regulations to discipline loan officers accompanied by appropriate enforcement technology and well designed hiring policies. It also highlights the need for further work to investigate the generality of study results on other typical biases.

About this Publication

By Agier, I. & Szafarz, A.