Grassroots Banking: The Effect of Opening Banco Azteca on Economic Activity in Mexico Miriam Bruhn Inessa Love March 12, 2009
Motivation Access to Finance is associated with growth and poverty alleviation (World Bank, 2008, Honohan, 2004) While the microfinance industry has expanded, there is little casual evidence on its impacts (Harford, 2008, Karlan and Morduch, 2009) Even less is known about the channels
This Paper Use a diff-in-diff methodology to study the impact of increased access to financial services to lowand middle-income households on employment choices and income levels The event: in October 2002, Grupo Elektra launched Banco Azteca, opening a total of 815 branches in all pre-existing Grupo Elektra stores
A Bank for the Underserved Population "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." Ricardo B. Salinas, Chairman of the Board of Grupo Elektra (Reuters, 2002)
Bank for
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
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.
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
Elektra / Azteca s Loan Portfolio over Time 12,000 10,000 8,000 6,000 4,000 2,000-20001 20002 20003 20004 20011 20012 20013 20014 20021 20022 20023 20024 20031 20032 20033 20034 20041 20042 20043 20044 Grupo Elektra s loan portfolio (millions of pesos) Quarters
A Non-Trivial Impact on the Financial Market (2) Number of savings accounts also grew rapidly in municipalities with Azteca branches
Impact of Azteca Opening on Savings Accounts over Time 20002 20003 20004 20011 20012 20013 20014 20021 20022 20023 20024 20031 20032 20033 20034 20041 20042 20043 20044 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0-2,000-4,000 Quarter Coefficients on Azteca Municipalities in Dec 2002 *Quarter Dummies
Questions We Address in this Paper How did increased access to financial services impact Entrepreneurial activity Individual employment choices Income levels
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) Intended to measure employment and size of informal economy Final sample Only municipalities with any bank branch (comparability) 576 municipalities, of which 249 (43%) had an Azteca branch in forth quarter of 2002, and 327 did not have an Azteca branch, but had a branch of a different bank
Methodology We explore cross-municipality and cross-time variation in Azteca branches y ict = α + β + γ + δ * Azteca * After + π * Z + ε c t c t ict ict Where: Azteca is a dummy for municipalities which had at least one Azteca branch in 2002-IV After is a dummy for after 2002-IV Y is individual outcome variables, Z individual controls
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
Identification Issues (1) Differences in levels across municipalities is not a concern
Summary Statistics Levels Pre-Azteca Averages of Individual Level Variables Municipalities with any Azteca branch in Dec 2002 Municipalities without Azteca, but with other branch in Dec 2002 Coefficient of Azteca dummy (1) (2) (3) Outcome Variables Levels Informal business owner dummy 0.0821 0.1380-0.0560*** (0.2745) (0.3449) (0.0087) Formal business owner dummy 0.0790 0.0656 0.0134*** (0.2697) (0.2475) (0.0033) Wage earner dummy 0.4969 0.4403 0.0566*** (0.5000) (0.4964) (0.0111) Not Employed dummy 0.3417 0.3560-0.0143** (0.4743) (0.4788) (0.0067) Above minium wage dummy 0.5827 0.4763 0.1064*** (0.4931) (0.4994) (0.0161) Log monthly income +1 4.9999 4.4705 0.5294*** (3.9346) (3.8103) 0.0918 Note : Standard errors in parentheses (clustered at municipality level). The employed include wage earners and self-employed/business owners. Changes are changes in ENE municipality averages from one quarter to the same quarter of the next year, using data from 2000-II to 2002-III Significance levels: * 10%, ** 5%, *** 1%
Identification Issues (2) Difference in changes might bias our results
Summary Statistics Changes Pre-Azteca Averages of Individual Level Variables Municipalities with any Azteca branch in Dec 2002 Municipalities without Azteca, but with other branch in Dec 2002 Coefficient of Azteca dummy (1) (2) (3) Outcome Variables Changes Informal business owner change -0.0023-0.0010-0.0013 (0.0388) (0.0551) 0.0021 Formal business owner change 0.0049 0.0055-0.0005 (0.0264) (0.0360) (0.0014) Wage earner change -0.0038 0.0031-0.0068*** (0.0486) (0.0690) (0.0026) Not Employed change 0.0012-0.0075 0.0087*** (0.0467) (0.0649) (0.0025) Above minium wage change 0.0001 0.0059-0.0059** (0.0516) (0.0650) (0.0026) Log monthly income change 0.0311 0.0982-0.0671*** (0.3612) (0.4593) (0.0182) Note : Standard errors in parentheses (clustered at municipality level). The employed include wage earners and self-employed/business owners. Changes are changes in ENE municipality averages from one quarter to the same quarter of the next year, using data from 2000-II to 2002-III Significance levels: * 10%, ** 5%, *** 1%
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
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
Results (1) Informal business owners Higher proportion in municipalities with Azteca after Azteca opened
Impact on Informal Entrepreneurial Activity Dependent variable: Informal business owner dummy (1) (2) (3) Complete Sample Azteca*Post Dec 2002 0.0062** 0.0062** 0.0067** (0.0027) (0.0028) (0.0027) R-squared 0.069 0.057 0.069 No. of observations 4,728,268 4,728,268 4,728,268 Group time trend No Yes No Municipality time trend No No Yes Note : Standard errors in parentheses (clustered at municipality level). Regressions include quarter and municipality fixed effects, as well as individual level control variables. Individual level control variables are gender, age, marital status, and education dummies. Significance levels: * 10%, ** 5%, *** 1%
0.15 0.145 0.14 0.135 0.13 0.125 0.12 Impact on Informal Entrepreneurial Activity (cont.) 20002 20003 20004 20011 20012 20013 20014 20021 20022 20023 20024 20031 20032 20033 20034 20041 20042 20043 20044 Quarter Municipalities without Azteca Municipalities with Azteca 0.089 0.088 0.087 0.086 0.085 0.084 0.083 0.082 0.081 0.08 Average Infomal Business Dummy
Impact on Informal Entrepreneurial Activity (cont.) 0.02 0.015 0.01 0.005 0 20003 20004 20011 20012 20013 20014 20021 20022 20023 20024 20031 20032 20033 20034 20041 20042 20043 20044-0.005-0.01-0.015-0.02 Quarter Coefficients on Azteca Municipalities Dec 2002* Quarter Dummies
Results (1), by Gender Informal business owners Higher proportion in municipalities with Azteca after Azteca opened ONLY significant for men
Impact on Informal Entrepreneurial Activity by Gender Dependent variable: Informal business owner dummy (1) (2) (3) Women Azteca*Post Dec 2002-0.0016 0.0033 0.0042 (0.0020) (0.0026) (0.0027) R-squared 0.031 0.019 0.032 No. of observations 2,515,225 2,515,225 2,515,225 Men Azteca*Post Dec 2002 0.0158*** 0.0091* 0.0101** (0.0053) (0.0051) (0.0047) R-squared 0.099 0.077 0.102 No. of observations 2,213,043 2,213,043 2,213,043 Group time trend No Yes No Municipality time trend No No Yes Note: Standard errors in parentheses (clustered at municipality level). Regressions include quarter and municipality fixed effects, as well as individual level control variables. Individual level control variables are gender, age, marital status, and education dummies. Significance levels: * 10%, ** 5%, *** 1%
Results (2) Formal business owners No difference (probably have access to other banks) Wage-earners No difference overall BUT, positive impact on women Not employed Decreased, for women only So far we find: More men in informal business, more women as wage-earners, less women as not employed
Impacts by Pre-Event Occupation Dependent variable: Informal Formal Wage-earners Not employed Pre-Event Occupation Informal 0.0394*** 0.0016-0.0280** -0.0130* (0.0148) (0.0084) (0.0116) (0.0078) Formal -0.0017-0.0204 0.0117 0.0103 (0.0107) (0.0195) (0.0130) (0.0104) Wage Earners 0.0019 0.0015-0.0019-0.0015 (0.0034) (0.0020) (0.0054) (0.0043) Not Employed 0.0053 0.0023 0.0088-0.0165** (0.0033) (0.0019) (0.0059) (0.0069)
Results (3) Transition matrix by individual s pre-event occupation Those previously informal are more likely to stay informal (less turnover in informal business owners), and less likely to transition to wageearners and not employed Those previously not employed are less likely to stay not employed and transition to other categories (mostly informal 11% and wageearners 14%)
Impacts on Income Dependent variable: Log (1+ income) Fourth root of income (1) (2) (3) (4) (5) (6) Complete Sample Azteca*Post Dec 2002-0.0283 0.0691** 0.0762*** -0.0155 0.0577** 0.0660*** (0.0240) (0.0286) (0.0275) (0.0242) (0.0269) (0.0255) R-squared 0.279 0.274 0.280 0.311 0.302 0.311 No. of observations 4,533,848 4,533,848 4,533,848 4,533,848 4,533,848 4,533,848 Group time trend No Yes No No Yes No Municipality time trend No No Yes No No Yes Note: Standard errors in parentheses (clustered at municipality level). Regressions include quarter and municipality fixed effects, as well as individual level control variables. Individual level control variables are gender, age, marital status, and education dummies. Significance levels: * 10%, ** 5%, *** 1%
Impact on Income by Pre-Event Occupation Dependent variable: Log (1+ income) Fourth root of income Pre-Event Occupation Informal 0.0721 0.0639 (0.0648) (0.0638) Formal -0.0116 0.0681 (0.1143) (0.1255) Wage Earners -0.0028-0.0092 (0.0451) (0.0431) Not Employed 0.0868* 0.0751* (0.0492) (0.0444) Note: Reported are coefficients on interaction term of Azteca* Post Dec 2002 estimated with municipality time trends. Standard errors in parentheses (clustered at municipality level). Regressions include quarter and municipality fixed effects, as well as individual level control variables. Individual level control variables are gender, age, marital status, and education dummies. Significance levels: * 10%, ** 5%, *** 1%
Impact on Proportion of Minimum Wage Earners Dependent variable: Above Minimum Wage Dummy Multiples of Minimum Wage (0) (1) (2) (3) (4) (5) Complete Sample Azteca*Post Dec 2002 0.0076*** 0.0086*** -0.0067** 0.0016 0.0013-0.0022 (0.0030) (0.0033) (0.0031) (0.0024) (0.0025) (0.0022) R-squared 0.030 0.041 0.055 0.034 0.031 0.206 No. of observations 4,533,848 4,533,848 4,533,848 4,533,848 4,533,848 4,533,848 Group time trend Yes Yes Yes Yes Yes Yes Municipality time trend No No No No No No
Results (4) Income is higher in municipalities with Azteca after opening Significant for men and women (larger impact on women) Income is higher for previously not employed The impact is only for those with low income levels (below minimum wage and in the 1-2 minimum wage bracket) more analysis needed
Conclusions Increased availability of financial services to low income individuals has a positive impact on economic activity More informal businesses by men (because of decreased turnover), with more women as wage-earners Overall less proportion of not employed Higher income, especially in those previously not employed However, the changes in income are mostly on the lower end of income distribution (below min wage and 1-2 min wage) Low documentation loans support informal businesses, while also allowing for increased labor market participation of women and higher income for previously not employed.