Access to financial services—credit, savings, and insurance products—remains largely inadequate for poor people, limiting their abilities to adopt more efficient technologies and improve resource allocation, and leaving them vulnerable to risk.
Among financial services, it is on the credit side that most progress has taken place. The rapid development of the microfinance sector, where loans are given with new arrangements that substitute for collateral, has provided access to credit to large numbers of small entrepreneurs. Ironically, this surge in the number of lenders is increasingly undermining the very mechanisms that made such lending possible, as competition among lenders reduces the ability of each other to contract under limited liability. In this environment, credit bureaus can become an attractive means for combating asymmetric information. We analyze in this project the emergence of a credit bureau in Guatemala, and its effects on the selection and behavior of a microfinance clientele.
On the saving side, much less activity has taken place, in large part because most lending institutions do not have the legal status of a bank that would allow them to collect savings. And yet, expectations are that the availability of good savings instruments would help poor people better weather shocks, thereby improving their welfare (and also possibly the repayment of larger loans) and reducing the need for taking credit at high interest rates. We analyze in this project the impact of providing additional financial services to clients who already have access to microfinance.
We use a unique confluence of data and identification methods to analyze how lending outcomes have responded to the introduction of a credit bureau in the microfinance market of Guatemala. In August of 2001, a major lender began to install hardware permitting branches to communicate information with the bureau, a process that was completed in ten waves over the course of 18 months. The lender did not inform borrowers on the use of the bureau, and we found knowledge of its use by the lender to be almost non-existent in surveys implemented after the rollout of the bureau across branches was complete. We therefore conducted a randomized training campaign in which we informed 5,000 borrowers of the use of the system; how the bureau works and what opportunities and risks it presents to them. We then used institutional data from the lender and from the bureau itself to track how a variety of lending outcomes emerged from this unusual structure in which asymmetric information was reduced on the two sides of the market at two different points in time. The resulting ability to disentangle the effects of the bureau on client selection and client behavior is, to our knowledge, unique to the literature.
A large bank in Guatemala is currently extending a new savings product to its microfinance clients, and is interested in trying to generate meaningful take-up of the product as well as generating higher savings balances. What is proposed here is the addition of two new savings products, and inclusion of new ways of marketing these savings products to enhance their diffusion. The research design is based on offering the different products to different subsets of new clients at different moments in time, and on using institutional data to track the savings balances of clients and impacts on other financial services such as credit and insurance. The research design allows identification of the optimal product design and promotion package to increase savings, studying heterogeneity in uptake and savings responses across different segments of the population. Assuming that the savings products have some impact on savings rates, we will identify whethers having access to an improved savings balance (i) decreases default on microfinance loans, (ii) substitutes for credit and/or for insurance in the demand for financial services, and (iii) allows households to better smooth consumption.
Results and Policy Implications
Photo credit: World Bank Photo Collection via Flickr