Stepping stone: the logic of financial inclusion through microfinance – evidence from China’s largest commercial microfinance institution

Purpose: This study assesses the impact of microfinance experience on rural households’ subsequent bank credit access, defined as the stepping-stone effect. We evaluate the average impact, heterogeneity and mechanisms of this effect and draw policy implications. Design/methodology/approach: Based on 2018 survey data from 2,347 rural households in six Chinese provinces, this study uses the IV-Probit model to evaluate the stepping-stone effect. Findings: The microfinance experience increases rural households’ probability of obtaining subsequent bank credit by six percentage points. Whether distinguished by social capital or economic wealth, this effect is at least as significant among households previously excluded from bank credit as it is among those originally favored by bank credit. Two mechanisms behind this effect are identified: (1) the microfinance experience provides financial education, transforming hidden demand for bank credit into effective demand and (2) the microfinance experience creates a credit record in the National Credit Information System, increasing the ability to obtain bank credit by providing banks with credible credit information. Originality/value: This study provides evidence of a progressive relationship in which microfinance acts as a stepping stone to deliver “credit graduate” clients to bank credit. And we also provide a different perspective for understanding MFIs’ relatively high interest rates. We may treat a part of the interest payment as a tuition for financial education and a price for credit information. Highlights: (1) We study whether microfinance in China had the stepping-stone effect of improving a rural household’s subsequent access to bank credit and investigate the likely mechanisms behind it.(2) Microfinance served as a stepping stone to bank credit: the microfinance experience increases rural households’ probability of obtaining subsequent bank credit by six percentage points.(3) Whether distinguished by social capital or economic wealth, this effect is at least as significant among households previously excluded from bank credit as it is among those originally favored by bank credit.(4) On the credit demand side, the microfinance experience provides financial education, transforming hidden demand for bank credit into effective demand.(5) On the credit supply side, the microfinance experience creates a credit record in the National Credit Information System, increasing the ability to obtain bank credit by providing banks with credible credit information.