From Pawn Shops to Banks : The Impact of Formal Credit on Informal Households

This paper examines the effects of expanding access to credit on the decisions and welfare of households. It focuses on the entry of Banco Azteca, the first bank in Mexico targeting households from the informal sector. Panel data suggest that infor...

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Bibliographic Details
Main Author:	Ruiz, Claudia
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2014
Subjects:	ABSENCE OF CREDIT ACCESS TO BANK ACCESS TO CAPITAL ACCESS TO CREDIT ACCESS TO FORMAL CREDIT ACCESS TO LOANS ALTERNATIVE CREDIT AMOUNT OF DEBT AVAILABILITY OF CREDIT BANK BRANCH BANK BRANCHES BANK CREDIT BANK LOAN BANK LOANS BANKS BORROWING BRANCH LICENSING BUDGET CONSTRAINT CASE STUDY COLLATERAL COLLATERAL REQUIREMENTS COMMERCIAL BANKS CONSUMER CREDIT CONSUMER INTERESTS CONSUMER PRICE INDEX CONSUMPTION EXPENDITURES CONSUMPTION INCREASES CONSUMPTION LEVEL CONSUMPTION SMOOTHING COOPERATIVES CREDIT ACCESS CREDIT ARRANGEMENTS CREDIT HISTORY CREDIT INCREASES CREDIT INSTITUTION CREDIT INSTITUTIONS CREDIT MARKET CREDIT MARKETS CREDIT OPTIONS CREDIT PRODUCTS CREDIT PROGRAM CREDIT PROVIDERS CREDIT SCHEMES DEBT DEFAULT RATE DEFAULTS DEMAND FOR CREDIT DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DEVELOPMENT POLICY DEVELOPMENT RESEARCH GROUP DURABLE DURABLE GOOD DURABLE GOODS DURABLES ECONOMIC ACTIVITY ECONOMIC GROWTH ECONOMIC RESEARCH ECONOMIC SITUATION ECONOMIES OF SCALE EDUCATION LEVEL ELASTICITY ELASTICITY OF SUBSTITUTION ELIGIBILITY CRITERIA EMPLOYMENT OPPORTUNITIES ENTREPRENEURS EXPECTED VALUE EXPENDITURE EXPENDITURES FAMILY BUSINESS FEDERAL RESERVE FINANCIAL ACCESS FINANCIAL INSTITUTIONS FINANCIAL SECTOR FINANCIAL SERVICES FINANCIAL STUDIES FIXED COST FORMAL CREDIT GOODS AS COLLATERAL GOVERNMENT CREDIT HIGH INTEREST RATES HOLDING HOUSEHOLD FIXED EFFECTS HOUSEHOLD LEVEL HOUSEHOLD SAVING HOUSEHOLDS HUMAN DEVELOPMENT INCOME INCOME LEVELS INCOME SHOCK INCOME SHOCKS INDICATOR FUNCTION INFORMAL CREDIT INFORMATION ON CREDIT INSTRUMENT INSURANCE INTEREST RATE INTEREST RATES INTERNATIONAL BANK INTERPOLATION LEGISLATION LENDER LEVY LIQUID ASSET LIQUID ASSETS LIQUID SAVINGS LIQUIDITY LIQUIDITY CONSTRAINTS LOAN LOAN AGENT LOAN AGENTS LOAN APPLICANTS LOAN PROCESS LOAN REQUEST LOAN SIZE LOAN SIZES LOANS FROM BANK LOANS FROM BANKS LOANS FROM FRIENDS MARKET PRICE MATURITY MFI MFIS MICRO ENTREPRENEURS MICROCREDIT MICROFINANCE MICROFINANCE INSTITUTION MONEYLENDERS MUNICIPALITIES NATIONAL INCOME NATIONAL LEVEL NEW BUSINESS OPERATING COST OPERATING COSTS PAWN PAWN SHOP PAWN SHOPS PAWNSHOP PAWNSHOPS PAYMENT HISTORIES PEER PRESSURE PER CAPITA INCOME PERSONAL LOAN POOR HOUSEHOLDS POSITIVE EFFECTS PRODUCTION FUNCTION PRODUCTIVITY REPAYMENT REPOSSESSION RETURN RETURNS RISK AVERSION RISK SHARING RURAL BANK RURAL BANK BRANCHES RURAL BANKS SAVINGS SECURITIES SIMULATIONS SOCIAL BANKING SOCIAL SECURITY STANDARD DEVIATION STANDARD ERRORS STOCKS UNEMPLOYMENT UTILITY FUNCTION VALUE OF COLLATERAL VILLAGE VILLAGE FUND VILLAGES
Online Access:	http://documents.worldbank.org/curated/en/2013/10/18343587/pawn-shops-banks-impact-formal-credit-informal-households http://hdl.handle.net/10986/16851

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Summary:	This paper examines the effects of expanding access to credit on the decisions and welfare of households. It focuses on the entry of Banco Azteca, the first bank in Mexico targeting households from the informal sector. Panel data suggest that informal households in municipalities with Banco Azteca branches experienced several changes in their saving, credit and consumption patterns. In order to estimate the impact of Azteca's entry, the paper develops a dynamic model of household choices in which the bank is endogenously selecting the municipalities for branch openings. The analysis finds that in municipalities in which the bank entered, households were better able to smooth their consumption and accumulate more durable goods even though the overall proportion of households that save went down by 6.6 percent. These results suggest that the use of savings as a buffer on income fluctuations declines once formal credit is available. What is more, these effects vary across households. Among informal households, those who never receive formal job offers have the highest decline in saving rates. The model is also used to evaluate a legislation to cap interest rates levied by formal credit institutions. Simulations suggest that if the Mexican government were to cap the interest rate of Azteca at the rate for traditional banks, Azteca would stop operating in the poorest and least populated municipalities.

From Pawn Shops to Banks : The Impact of Formal Credit on Informal Households

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