The Economic Impact of Banking the Unbanked: Evidence from Mexico

Transcription

1 The Economic Impact of Banking the Unbanked: Evidence from Mexico Miriam Bruhn Inessa Love November 20, 2009

2 Research Questions Does expanding access to finance to previously unbanked, low-income individuals promote economic activity? If yes, what are the channels? Does increased access to finance promote entrepreneurial activity?

3 Existing Evidence (1) Increased access to finance is associated with growth and poverty alleviation at the country level (World Bank, 2008, Honohan, 2004) Little micro level evidence showing that this relationship is causal Exception: Burgess and Pande (2005) show poverty reduction after rural banks open in India, but it s not clear what the channel is

4 Existing Evidence (2) US literature on banking deregulation shows positive impacts on firm creation and growth, and a reduction in inequality Jayarathne and Strahan (1996) Black and Strahan (2002) Cetorelli and Strahan (2006) Beck, Levine and Levkov (2008) Results probably due to increased bank competition, rather than reaching previously unbanked individuals

5 Microfinance While the microfinance industry has expanded rapidly, there is little casual evidence on its impact on economic activity and microenterprise growth (Harford, 2008, Karlan and Morduch, 2009) New papers Banerjee, Duflo, Glennester, and Kinnan (2009) Kaboski and Townsend (2009)

6 This Paper Exploit cross-municipality and cross-time variation in the recent opening of a bank for low-income individuals in Mexico to measure its effects on Entrepreneurial activity Employment Income The event: in October 2002, Grupo Elektra launched Banco Azteca, opening a total of 815 branches in all pre-existing Grupo Elektra stores

7 A Bank for the Underserved Population Ricardo B. Salinas, Chairman of the Board of Grupo Elektra (Reuters, 2002) "Banco Azteca will improve access to goods and services for our people. A major impediment to the growth of the Mexican middle class has been the lack of access to credit, one of the main vehicles for personal financial improvement. Banco Azteca will demonstrate the importance of offering financial services to this under- served segment of the Mexican population."

8 Access to Finance is Low in Mexico % of households with access to a bank account Argentina Brazil Chile Colombia Mexico Peru US

9 We changed banking, now it s your time to change Unique features of Banco Azteca: Low documentation (personal guarantees accepted instead of documents) 3000 motorcycle-riding agents Extensive experience making small installment loans and large database of 4 mil. past clients Small loan size - $250-$500 (comparable to microfinance, $360) Made it possible to reach the previously un-bankable population

10 Bank for

11 BUY A TOASTER, OPEN A BANK ACCOUNT Banco Azteca caters to the little guy--in appliance stores 13 January 2003 BusinessWeek 54, Number 3815 Pedro Rubio was in a bind. The 56-year-old carpenter needed to come up with thousands of pesos in notary fees to get legal title to his modest cinderblock house.. But Rubio, who earns the equivalent of $600 a month, had no proof of income and no bank account. So on a recent morning, he walked through his gritty Mexico City neighborhood to an Elektra appliance store. At the back, behind an aisle of microwave ovens, he sat down with a loan officer from a new bank, Banco Azteca. Unfazed by Rubio's worn jeans and unshaven face, the officer drew up an inventory of his possessions: TV, refrigerator, washing machine--all bought on credit at Elektra in the past three years. Accepting these as collateral, the bank approved Rubio's application within 24 hours. The nine-month, $200 loan carries a 48% annual interest rate, usurious by U.S. standards but not in Mexico, where the banking sector is still recovering from the effects of the 1994 peso crash. It's a little expensive,'' says Rubio. Still, he says he can swing the weekly $8 payments. In any event, he adds, I don't really have any other option.

12 A Non-Trivial Impact on the Financial Market (1) While Elektra was offering installment loans even before Azteca opened, the amount of loans grew significantly after the event Because of access to cheaper capital deposit base and lower cost of capital due to bank status

13 Grupo Elektra s loan portfolio (millions of pesos) Elektra / Azteca s Loan Portfolio over Time 12,000 10,000 8,000 6,000 4,000 2,000 - Quarters

14 A Non-Trivial Impact on the Financial Market (2) Number of savings accounts also grew rapidly in municipalities with Azteca branches

15 Coefficients on Azteca Municipalities in Dec 2002 *Quarter Dummies Impact of Azteca Opening on Savings Accounts over Time 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ,000-4,000 Quarter

16 Data Mexican National Employment Survey (ENE) Covers a random sample of approximately 150,000 households each quarter Households remain in the survey for five consecutive quarters 2000-II to 2004-IV (19 quarters in total, 10 before and 9 after event) Final sample Only municipalities with any bank branch (comparability) 576 municipalities, of which 43% had an Azteca branch in forth quarter of 2002

17 Variables Outcome variables Informal business owner dummy Formal business owner dummy Wage earner dummy Not Employed dummy Above minimum wage dummy Log monthly income +1 Controls Age, gender, marital status, and education dummies

18 Methodology We exploit cross-municipality and crosstime variation in Azteca branches y ict c t * Azteca c * Post t * Z ict ict Where Azteca = dummy for municipalities which had at least one Azteca branch in 2002-IV Post = dummy for after 2002-IV Y = individual outcome variable Z = individual controls

19 Map of Municipalities with Banco Azteca Branches and Other Bank Branches

20 Identification Issues (1) Differences in levels across municipalities are not a concern

21 Pre-Azteca Outcome Variables (Levels) Azteca Non-Azteca Difference (1) (2) (3) Informal business owner dummy *** (0.2745) (0.3449) (0.0087) Formal business owner dummy *** (0.2697) (0.2475) (0.0033) Wage earner dummy *** (0.5000) (0.4964) (0.0111) Not Employed dummy ** (0.4743) (0.4788) (0.0067) Above minimum wage dummy *** (0.4931) (0.4994) (0.0161) Log monthly income *** (3.9346) (3.8103)

22 Identification Issues (2) Difference in changes might bias our results Placement of branches not targeted based on expected demand since branches opened in ALL preexisting stores

23 Pre-Azteca Outcome Variables (Changes) Azteca Non-Azteca Difference (1) (2) (3) Informal business owner change (0.0388) (0.0551) Formal business owner change (0.0264) (0.0360) (0.0014) Wage earner change *** (0.0486) (0.0690) (0.0026) Not Employed change *** (0.0467) (0.0649) (0.0025) Above minimum wage change ** (0.0516) (0.0650) (0.0026) Log monthly income change *** (0.3612) (0.4593) (0.0182)

24 Identification Issues (3) Our results may be biased against Finding a positive effect on the fraction of wage earners Finding a negative effect on the fraction of not employed Finding a positive effect on income Our estimates are on the conservative side

25 Reducing the Biases Group trends (municipalities with and without Azteca are allowed to have different trends) Each municipality is allowed to have a different trend Graphical analysis

26 Impact on Informal Entrepreneurial Activity Dependent variable: Informal business owner dummy (1) (2) (3) Azteca*Post Dec ** ** ** (0.0027) (0.0028) (0.0027) R-squared No. of observations 4,728,268 4,728,268 4,728,268 Group time trend No Yes No Municipality time trend No No Yes Effect = 7.6 percent increase

27 Impact on Formal Entrepreneurial Activity Dependent variable: Formal business owner dummy (1) (2) (3) Azteca*Post Dec * (0.0022) (0.0021) (0.0021) R-squared No. of observations 4,728,268 4,728,268 4,728,268 Group time trend No Yes No Municipality time trend No No Yes

28 Impact on Wage Earners Dependent variable: Wage earner dummy (1) (2) (3) Azteca*Post Dec (0.0035) (0.0040) (0.0038) R-squared No. of observations 4,728,268 4,728,268 4,728,268 Group time trend No Yes No Municipality time trend No No Yes

29 Impact on Not Employed Dependent variable: Not employed dummy (1) (2) (3) Azteca*Post Dec *** *** (0.0032) (0.0034) (0.0034) R-squared No. of observations 4,728,268 4,728,268 4,728,268 Group time trend No Yes No Municipality time trend No No Yes Effect = 1.4 percent increase in employment

30 Impacts by Pre-Event Occupation Dependent variable: Informal Formal Wage earners Not employed Log (1+ income) Pre-Event Informal *** ** * (0.0148) (0.0084) (0.0116) (0.0078) (0.0648) Formal (0.0107) (0.0195) (0.0130) (0.0104) (0.1143) Wage Earners (0.0034) (0.0020) (0.0054) (0.0043) (0.0451) Not Employed ** * (0.0033) (0.0019) (0.0059) (0.0069) (0.0492)

31 Impact on Income Dependent variable: Log (1 + Income) (1) (2) (3) Azteca*Post Dec ** *** (0.0240) (0.0286) (0.0275) R-squared No. of observations 4,533,848 4,533,848 4,533,848 Group time trend No Yes No Municipality time trend No No Yes

32 Conclusions Increased availability of financial services to low income individuals has a positive impact on economic activity More informal businesses (because of decreased turnover) for men Overall increase in employment, particularly for women Higher income, especially in those previously not employed

33 Future Research Cannot disentangle whether the effects are due to increases in savings or credit Are working on another paper to look at Effects on competition in the banking markets Effects on savings and credit Will use bank data and household data Are also examining gender effects in more detail