Expanding Access to Finance and Entrepreneurial Activity: Evidence from Mexico.

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Expanding Access to Finance and Entrepreneurial
Activity Evidence from Mexico.

• Miriam Bruhn
• Inessa Love
• May, 2009

2
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

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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

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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)

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Bank for
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We changed banking,now its 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

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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.

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Map of Municipalities with Banco Azteca Branches
and Other Bank Branches
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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

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Elektra / Aztecas Loan Portfolio over Time
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A Non-Trivial Impact on the Financial Market (2)

• Number of savings accounts also grew rapidly in
  municipalities with Azteca branches

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Impact of Azteca Opening on Savings Accounts over
Time
13
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.

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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

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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

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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

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Identification Issues (1)

• Differences in levels across municipalities is
  not a concern

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Summary Statistics Levels
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Identification Issues (2)

• Difference in changes might bias our results

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Summary Statistics Changes
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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

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Reducing the Biases

• Grouptrends (municipalities with and without
  Azteca are allowed to have different trends)
• Each municipality is allowed to have a different
  trend
• Graphical analysis

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Aggregate Results

• Informal business owners
• Higher proportion in municipalities with Azteca
  after Azteca opened

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Impact on Informal Entrepreneurial Activity
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Impact on Informal Entrepreneurial Activity
(cont.)
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Question 1

• Is the impact of the event on the proportion of
  informal business owners different for men and
  women?

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Impact on Informal Entrepreneurial Activity by
Gender
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Results (1), Informal Business Owners, by Gender

• Informal business owners
• Higher proportion in municipalities with Azteca
  after Azteca opened
• ONLY significant for men

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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?

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Impact on Wage earners, by Gender
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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

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Question 3

• Is the Impact different for different categories
  of pre-event occupations for men and women?
• Informal
• Formal
• Wage-Earner
• Not Employed

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Impacts by Pre-Event OccupationWomen
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Impacts by Pre-Event OccupationMen
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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

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Question 4

• Are the results on income different for men and
  women?
• Are the income impacts different by pre-event
  occupation?

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Impacts on Income, by Gender
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Impact on Income by Pre-Event Occupation and
Gender
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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

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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.