Geographic diversification and credit supply in times of trouble: Evidence from microlending

This paper investigates the impact of geographic diversification on the provision of credit during a financial crisis. We analyse in particular the microlending crisis that occurred in Nicaragua from mid-2008. We find that during the crisis, lenders reduced overall credit provision but to a lesser extent to those geographic areas that contributed most to geographic diversification in the boom period. This mitigation effect was greater for those lenders that were more geographically diversified before the onset of the crisis. Furthermore, we discover that lenders with major loan monitoring problems, that is lenders with larger credit officers’ portfolios, cut lending relatively less to those geographic areas that contributed most to geographic diversification. Overall, our results suggest that geographic diversification can support lending when a credit boom ends in a crisis.