Does Formal Credit Lead to More Financial Inclusion or Distress? Results Using a Strict Scoring Rule Amongst the Poor in Paraguay
Viviane Azevedo (IIC); Jeanne Lafortune (PUC, Chile and JPAL; firstname.lastname@example.org)*; Jose Tessada (PUC, Chile and JPAL, email@example.com)*
We exploit the fact that a formal bank entered a low-income market in Paraguay using a strict assignment rule for credit and look at the impact of obtaining that credit through a regression discontinuity. Using administrative data from the Credit Bureau, we find that those who were loan-eligible saw a substantial increase in the number of information requests to the Bureau, particularly from formal sources (finance companies and cooperatives). This appears to be long-lasting and concentrated amongst individuals who had limited experience with the credit market previously. We find limited evidence that this increased interaction with the financial markets increased the amount of debt declared as unpaid 2-3 years after the loan was offered but did lower loan-eligible individuals' average credit score substantially. Heterogeneity analysis suggests that those that were unknown to the financial sector benefited more without falling into default but those who were excluded for previous bad behavior simply worsened their credit situation by obtaining this loan.
Discussant: Xavi Gine (World Bank, firstname.lastname@example.org)
Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering Policies
Pablo Slutzky (University of Maryland, email@example.com)*; Mauricio Villamizar-Villegas (Central Bank of Colombia); Tomas Williams (George Washington University, firstname.lastname@example.org)*
We explore the unintended consequences of anti-money laundering (AML) policies. For identification, we exploit the implementation of the SARLAFT system in Colombia in 2008, aimed at controlling the flow of money from drug trafficking into the financial system. We find that bank deposits in municipalities with high drug trafficking activity decline after the implementation of the new AML policy. More importantly, this negative liquidity shock has consequences for credit in municipalities with little or nil drug trafficking. Banks that source their deposits from areas with high drug trafficking activity cut lending relative to banks that source their deposits from other areas. We show that this credit shortfall negatively impacted the real economy. Using a proprietary database containing data on bank-firm credit relationships, we show that small firms that rely on credit from affected banks experience a negative shock to investment, sales, size, and profitability. Additionally, we observe a reduction in employment in small firms. Our results suggest that the implementation of the AML policy had a negative effect on the real economy.
Discussant: Julio Riutort (Universidad Adolfo Ibáñez, Chile, email@example.com)
How Debit Cards Enable the Poor to Save More
Pierre Bachas (World Bank); Paul Gertler (UC Berkeley); Sean Higgins (Northwestern University); Enrique Seira (ITAM, firstname.lastname@example.org)*
While formal savings can have a number of positive impacts for the poor, savings and active account use remain low. We study an at-scale natural experiment in Mexico in which debit cards are rolled out to beneficiaries of a cash transfer program, who already received transfers directly deposited into a savings account. Using administrative account data and household surveys, we find that after two years with a card, beneficiaries accumulate a savings stock equal to 2 percent of annual income. We show that the increase in formal savings appears to be an increase in overall savings, financed by a voluntary reduction in current consumption. Debit cards increase account usage and savings through two mechanisms: first, they reduce the transaction costs of accessing money in the account; second, they reduce monitoring costs, which leads beneficiaries to check their account balances frequently and build trust in the bank.
Discussant: Jaime Ruiz-Table (Universidad de Chile, email@example.com)
Financial Access Under the Microscope
Sumit Agarwal (National University of Singapore); Thomas Kigabo (Federal Reserve Board); Camelia Minoiu (Federal Reserve Board, firstname.lastname@example.org)*; Andrea Presbitero (International Monetary Fund and MoFiR, email@example.com)*; Andre Silva (Federal Reserve Board, firstname.lastname@example.org)*
We examine the impact of a large-scale microcredit expansion program on financial access and the transition of previously unbanked borrowers to commercial banks. Administrative data on the universe of loans to individuals show the program improved access to credit, especially in underdeveloped areas. A sizable share of first-time borrowers who need a second loan switch from microfinance institutions to commercial banks, which cream-skim low-risk borrowers and grant them larger, cheaper, and longer-term loans. These borrowers are not riskier than those already at commercial banks. The microfinance sector, together with well-functioning credit reference bureaus, help mitigate information frictions in credit markets.
Discussant: Ralph de Hass (EBRD, deHaasR@ebrd.com)