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From pawn shops to banks : the impact of formal credit on informal households

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  • Ruiz, Claudia

Abstract

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.

Suggested Citation

  • Ruiz, Claudia, 2013. "From pawn shops to banks : the impact of formal credit on informal households," Policy Research Working Paper Series 6634, The World Bank.
  • Handle: RePEc:wbk:wbrwps:6634
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    References listed on IDEAS

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    1. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-1248, September.
    2. Jain, Sanjay, 1999. "Symbiosis vs. crowding-out: the interaction of formal and informal credit markets in developing countries," Journal of Development Economics, Elsevier, vol. 59(2), pages 419-444, August.
    3. Pascaline Dupas & Sarah Green & Anthony Keats & Jonathan Robinson, 2014. "Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province," NBER Chapters,in: African Successes, Volume III: Modernization and Development, pages 63-101 National Bureau of Economic Research, Inc.
    4. Lee, Jeong-Joon & Sawada, Yasuyuki, 2010. "Precautionary saving under liquidity constraints: Evidence from rural Pakistan," Journal of Development Economics, Elsevier, vol. 91(1), pages 77-86, January.
    5. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
    6. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 1-55.
    7. Robin Burgess & Rohini Pande, 2005. "Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment," American Economic Review, American Economic Association, vol. 95(3), pages 780-795, June.
    8. Maurizio Mazzocco & Shiv Saini, 2012. "Testing Efficient Risk Sharing with Heterogeneous Risk Preferences," American Economic Review, American Economic Association, vol. 102(1), pages 428-468, February.
    9. Alessie, Rob & Devereux, Michael P. & Weber, Guglielmo, 1997. "Intertemporal consumption, durables and liquidity constraints: A cohort analysis," European Economic Review, Elsevier, vol. 41(1), pages 37-59, January.
    10. Joseph P. Kaboski & Robert M. Townsend, 2012. "The Impact of Credit on Village Economies," American Economic Journal: Applied Economics, American Economic Association, vol. 4(2), pages 98-133, April.
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    Cited by:

    1. Pascaline Dupas & Sarah Green & Anthony Keats & Jonathan Robinson, 2014. "Challenges in Banking the Rural Poor: Evidence from Kenya's Western Province," NBER Chapters,in: African Successes, Volume III: Modernization and Development, pages 63-101 National Bureau of Economic Research, Inc.
    2. Miriam Bruhn & Inessa Love, 2011. "Gender differences in the impact of banking services: evidence from Mexico," Small Business Economics, Springer, vol. 37(4), pages 493-512, November.
    3. Eduardo A. Cavallo & Tomás Serebrisky & Verónica Frisancho & Jonathan Karver & Andrew Powell & Diego Margot & Ancor Suárez-Alemán & Eduardo Fernández-Arias & Matías Marzani & Solange Berstein & Marian, 2016. "Saving for Development: How Latin America and the Caribbean Can Save More and Better," IDB Publications (Books), Inter-American Development Bank, number 94597 edited by Eduardo A. Cavallo & Tomás Serebrisky, February.
    4. repec:rss:jnljms:v2i3p2 is not listed on IDEAS

    More about this item

    Keywords

    Access to Finance; Banks&Banking Reform; Small Area Estimation Poverty Mapping; Economic Theory&Research; Debt Markets;

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