Winners and Losers: The Benefits and Dangers of Credit

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In Egypt, researchers evaluated the impact of providing large loans on the revenues, profits, wage bills, productivity, and household expenditures of small businesses owners. These loans were up to four times larger than previous loans the firm owners had received.

Key results

Profits and household expenditures increased by a large amount, but only for top performers. Although large loans did not have an impact for the average borrower, firm owners who were predicted to be top performers increased their monthly profits by 55 percent.

On the other hand, profits halved for firm owners who were predicted to be low performers. In some cases, larger loans even led to the firm going out of business.

Overoptimism may have been a contributing factor to the poor performance of certain firm owners. Those who identified with statements consistent with high optimism were less likely to see positive impacts of larger loans.

Loan officers may not accurately assess potential clients, leading to poor lending choices. Loan officers perceived clients predicted to be top performers to be more likely to default than those predicted to be low performers.