Working Paper: CEPR ID: DP6180
Authors: Dean S. Karlan; Jonathan Zinman
Abstract: Expanding credit access is a key ingredient of development strategies worldwide. Microfinance practitioners, policymakers, and donors have ambitious goals for expanding access, and seek efficient methods for implementing and evaluating expansion. There is less consensus on the role of consumer credit in expansion initiatives. Some microfinance institutions are moving beyond entrepreneurial credit and offering consumer loans. But many practitioners and policymakers are skeptical about ?unproductive? lending. These concerns are fueled by academic work highlighting behavioural biases that may induce consumers to overborrow. We estimate the impacts of a consumer credit supply expansion using a field experiment and follow-up data collection. A South African lender relaxed its risk assessment criteria by randomly approving some marginal applications it normally would have rejected. We estimate the resulting impacts using new survey data on borrower behaviour and well-being, and administrative data on loan repayment. We find that the marginal loans produced measurable benefits in the form of increased employment, reduced hunger, and reduced poverty. The marginal loans also appear to have been profitable for the lender. The results must be interpreted with caution but suggest that consumer credit expansions can be welfare-improving.
Keywords: Loans; Microfinance; Credit Access
JEL Codes: E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Relaxing credit constraints (E51) | Increase in likelihood of retaining wage employment (J29) |
| Marginal loans (H81) | Reduction in incidence of severe hunger (I32) |
| Marginal loans (H81) | Decrease in poverty levels (I32) |
| Credit access (G21) | Facilitation of productive investments and consumption smoothing (E20) |
| Marginal loans (H81) | Profitability for the lender (G21) |