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

We investigate the impact of geographic diversification on the provision of credit during a financial bust. We find that during the Nicaraguan microlending crisis, lenders reduced overall credit provision but to a lesser extent to those geographic areas that contributed most to geographic diversification in the pre-crisis period. This mitigation effect was greater for those lenders that were more geographically diversified before the onset of the crisis; and for lenders with a larger portfolio per credit officer (or a higher number of borrowers per credit officer). The latter type of lenders went through a rapid deterioration of the portfolio quality during the crisis period. Geographic diversification can contribute to mitigating the downsides of excessive risk-taking.