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Financial Intermediation in Emerging Economies

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)

Manchester Grand Hyatt, Old Town B
Hosted By: Society for the Study of Emerging Markets
  • Chair: Sergio Schmukler, World Bank

Does Formal Credit Lead to More Financial Inclusion or Distress? Results Using a Strict Scoring Rule Amongst the Poor in Paraguay

Viviane Azevedo
,
Industrial Internet Consortium
Jeanne Lafortune
,
Pontifical Catholic University of Chile and Jameel Poverty Action Lab
José A. Tessada
,
Pontifical Catholic University of Chile and Jameel Poverty Action Lab

Abstract

Through a regression discontinuity, we measure the impact of being offered a credit after a formal bank in Paraguay deployed a new credit product with an algorithm-based strict decision rule for clients who could not be evaluated with traditional methods. Using administrative data from the country's credit bureau, we find that applicants deemed loan-eligible saw a substantial and long-lasting increase in the number of information requests made to the bureau, particularly from formal sources (finance companies and cooperatives). We find limited evidence that these applicants saw an increase in the amount of debt declared as unpaid but did experience lower credit scores. Self-reported outcomes for a subset of applicants suggest significant economic benefits for those who became loan-eligible, the main channel being lower credit costs. Heterogeneity analysis suggests that applicants who were previously unknown to the financial sector benefited more from being granted loan eligibility without falling into default, while those who had previously had more interactions with the credit market simply worsened their financial situation. This suggests that granting loans using new technologies to construct alternative screening mechanisms may be particularly beneficial when targeted to clients with limited credit market experience.

Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering Policies

Pablo Slutzky
,
University of Maryland
Mauricio Villamizar-Villegas
,
Central Bank of Colombia
Tomas Williams
,
George Washington University

Abstract

This paper documents a hidden cost of anti-money laundering policies. We show that a policy implemented in Colombia reduced bank deposits in high intensity drug trafficking areas, causing banks that source deposits from these areas to cut lending in other areas, negatively impacting employment and number of
firms. Additionally, using a proprietary database on bank-firm relationships, we show that small firms that rely on affected banks experience a negative shock to sales, investment, and profitability. Last, we use night lights data to show that these results are not due to a reallocation of activity across firms or to a move to the informal economy.

How Debit Cards Enable the Poor to Save More

Pierre Bachas
,
World Bank
Paul Gertler
,
University of California-Berkeley
Sean Higgins
,
Northwestern University
Enrique Seira
,
Technological Autonomous University of Mexico (ITAM)

Abstract

We study an at-scale natural experiment in which debit cards are given to cash transfer recipients who already have a bank account. Using administrative account data and household surveys, we find that beneficiaries accumulate a savings stock equal to 2 percent of annual income after two years with the card. The increase in formal savings represents an increase in overall savings, financed by a reduction in current consumption. There are two mechanisms: first, debit cards reduce transaction costs of accessing money; second, they reduce monitoring costs, leading beneficiaries to check their account balances frequently and build trust in the bank.

Financial Access Under the Microscope

Sumit Agarwal
,
National University of Singapore
Thomas Kigabo
,
National Bank of Rwanda
Camelia Minoiu
,
Federal Reserve Board
Andrea Presbitero
,
International Monetary Fund and MoFiR
Andre F. Silva
,
Federal Reserve Board

Abstract

We examine the impact of a large-scale microcredit expansion program on financial access and
the transition of previously-unbanked borrowers to commercial banks. Using administrative data
on the universe of loans from a credit register accessible to all lenders, we show that the program
improved access to credit, especially in underdeveloped areas, with positive effects on business
and mortgage lending. The program also generated positive spillovers to the commercial banking
sector. As the newly-created microfinance institutions (MFIs) faced lending constraints, a sizable
share of first-time borrowers obtained subsequent loans—that were larger, cheaper, and longer-term—from commercial banks, which expanded their branch network in under-served low-risk
areas. The individuals switching from MFIs to banks were less risky than non-switchers and not
riskier than existing bank borrowers. Overall, our results suggest that the microfinance sector,
coupled with a credit reference bureau, can mitigate information frictions in credit markets and
serves as a pathway for first-time borrowers to commercial banks.
Discussant(s)
Xavi Gine
,
World Bank
Julio Riutort
,
Adolfo Ibáñez University
Jaime Ruiz-Tagle
,
University of Chile
Ralph De Haas
,
European Bank for Reconstruction and Development
JEL Classifications
  • G2 - Financial Institutions and Services
  • F3 - International Finance