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Expanding Access to Finance and Entrepreneurial Activity: Evidence from Mexico. Miriam Bruhn Inessa Love May, 2009. Motivation. Access to Finance is associated with growth and poverty alleviation (World Bank, 2008, Honohan, 2004)
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Expanding Access to Finance and Entrepreneurial Activity: Evidence from Mexico. Miriam Bruhn Inessa Love May, 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 low- and 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)
“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 ACCOUNTBanco 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.”
Map of Municipalities with Banco Azteca Branches and Other Bank Branches
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
A Non-Trivial Impact on the Financial Market (2) • Number of savings accounts also grew rapidly in municipalities with Azteca branches
Questions We Address in this Paper • How did increased access to financial services impact • Entrepreneurial activity • Individual employment choices • Income levels • How do these effects vary by gender.
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 • 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
Identification Issues (2) • Difference in changes might bias our results
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
Aggregate Results • Informal business owners • Higher proportion in municipalities with Azteca after Azteca opened
Question 1: • Is the impact of the event on the proportion of informal business owners different for men and women?
Results (1), Informal Business Owners, by Gender • Informal business owners • Higher proportion in municipalities with Azteca after Azteca opened • ONLY significant for men
Question 2: • Is the impact of the event on the proportion of formal business owners, wage-earners and not employed different for men and women?
Results (2), Impact on Wage earners and Not Employed, by Gender • Formal business owners • No difference (probably have access to other banks) • Wage-earners • Positive impact on women only • Not employed • Decreased, for women only • So far we find: • More men run informal businesses, more women as wage-earners, fewer women not employed
Question 3: • Is the Impact different for different categories of pre-event occupations for men and women? • Informal • Formal • Wage-Earner • Not Employed
Results (3), Impact by Pre-event Occupation, by Gender • For women: • Owners of informal businesses are more likely to stay informal • Owners of formal businesses are less likely to transition to being informal • Not employed are less likely to stay not employed and more likely to start informal business • For men: • Owners of informal businesses are more likely to stay informal and less likely to transition to wage earners • Wage earners are more likely to start informal business • Not employed are less likely to stay not employed
Question 4: • Are the results on income different for men and women? • Are the income impacts different by pre-event occupation?
Results (4), Impact on Income • 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
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, stronger for women • Higher income, especially in those previously not employed, stronger for women. • Low documentation loans support informal businesses, while also allowing for increased labor market participation of women and higher income for previously not employed.
