Expanding Access to Finance and Entrepreneurial Activity: Evidence from Mexico. Miriam Bruhn Inessa Love May, 2009.

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

Miriam BruhnInessa 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 underserved segment of the Mexican population."

Ricardo B. Salinas, Chairman of the Board ofGrupo 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 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

Elektra / Azteca’s 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

Impact of Azteca Opening on Savings Accounts over Time

-4,000

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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

icticttctcict ZAfterAztecay ***

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

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 LevelsInformal 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

Pre-Azteca Averages of Individual Level Variables

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%


Difference in changes might bias our results

Summary Statistics Changes

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 ChangesInformal business owner change -0.0023 -0.0010 -0.0013

(0.0388) (0.0551) 0.0021Formal 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)

Pre-Azteca Averages of Individual Level Variables

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%


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

Impact on Informal Entrepreneurial Activity

(1) (2) (3)Complete SampleAzteca*Post Dec 2002 0.0062** 0.0062** 0.0067**

(0.0027) (0.0028) (0.0027)

R-squared 0.069 0.057 0.069No. of observations 4,728,268 4,728,268 4,728,268

Group time trend No Yes No Municipality time trend No No Yes

Informal business owner dummy

Dependent variable:

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 Informal Entrepreneurial Activity (cont.)

0.12

0.125

0.13

0.135

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0.145

0.15

20002

20003

20004

20011

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20013

20014

20021

20022

20023

20024

20031

20032

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20034

20041

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Quarter

0.080.0810.0820.0830.0840.0850.0860.0870.0880.089

Municipalities without Azteca Municipalities with Azteca

Aver

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Info

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Question 1:

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

Impact on Informal Entrepreneurial Activity by Gender

(1) (2) (3)WomenAzteca*Post Dec 2002 -0.0016 0.0033 0.0042

(0.0020) (0.0026) (0.0027)R-squared 0.031 0.019 0.032No. of observations 2,515,225 2,515,225 2,515,225

MenAzteca*Post Dec 2002 0.0158*** 0.0091* 0.0101**

(0.0053) (0.0051) (0.0047)R-squared 0.099 0.077 0.102No. of observations 2,213,043 2,213,043 2,213,043

Group time trend No Yes No Municipality time trend No No Yes

Informal business owner dummy

Dependent variable:

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 (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?

Impact on Wage earners, by Gender

(1) (2) (3) (4) (5) (6)Panel A. Complete SampleAzteca*Post Dec 2002 -0.0042 0.0039 0.0034 0.0019 -0.0089*** -0.0098***

(0.0035) (0.0040) (0.0038) (0.0032) (0.0034) (0.0034)R-squared 0.140 0.136 0.141 0.230 0.226 0.230No. of observations 4,728,268 4,728,268 4,728,268 4,728,268 4,728,268 4,728,268

Panel B: WomenAzteca*Post Dec 2002 0.0033 0.0095** 0.0108** -0.0004 -0.0138** -0.0159***

(0.0043) (0.0044) (0.0045) (0.0052) (0.0054) (0.0054)R-squared 0.139 0.133 0.140 0.109 0.119No. of observations 2,515,225 2,515,225 2,515,225 2,515,225 2,515,225 2,515,225

Panel C: MenAzteca*Post Dec 2002 -0.0135*** -0.0030 -0.0055 0.0041 -0.0024 -0.0027


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%

Dependent variable:Wage earner dummy Not Employed dummy

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

Impacts by Pre-Event OccupationWomenPanel B: Women

Informal Formal Wage-earners Not employedPre-Event OccupationInformal 0.0371* -0.0007 -0.0016 -0.0347

(0.0217) (0.0113) (0.0169) (0.0215)

Formal -0.0317** -0.0149 0.0250 0.0216(0.0148) (0.0351) (0.0200) (0.0279)

Wage Earners -0.0056 0.0025 0.0051 -0.0019(0.0042) (0.0026) (0.0090) (0.0091)

Not Employed 0.0079** 0.0010 0.0067 -0.0157**(0.0036) (0.0017) (0.0053) (0.0068)

Dependent variable:

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%

Impacts by Pre-Event OccupationMen

Table C: MenInformal Formal Wage-earners Not employed

Pre-Event OccupationInformal 0.0428** 0.0010 -0.0393*** -0.0043

(0.0177) (0.0107) (0.0150) (0.0058)

Formal 0.0113 -0.0319 0.0168 0.0035(0.0136) (0.0198) (0.0136) (0.0071)

Wage Earners 0.0083* 0.0004 -0.0048 -0.0039(0.0044) (0.0027) (0.0059) (0.0034)

Not Employed -0.0045 0.0107 0.0277 -0.0339*(0.0102) (0.0081) (0.0194) (0.0200)

Dependent variable:


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?

Impacts on Income, by Gender

(1) (2) (3) (4) (5) (6)Panel A. Complete SampleAzteca*Post Dec 2002 -0.0283 0.0691** 0.0762*** -0.0155 0.0577** 0.0660***


Panel B: WomenAzteca*Post Dec 2002 -0.0063 0.0712* 0.0907** 0.0093 0.0550 0.0727**


Table C: MenAzteca*Post Dec 2002 -0.0538** 0.0541* 0.0483* -0.0451 0.0500 0.0479*


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%

Log (1+ income) Fourth root of income Dependent variable:

Impact on Income by Pre-Event Occupation and Gender

Pre-Event Occupation Log (1+ income) Fourth root of income Panel A: Complete SampleInformal 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)Panel B: WomenInformal 0.1212 0.0828

(0.1536) (0.1312)Formal -0.1021 -0.0037

(0.2835) (0.2791)Wage Earners -0.0081 -0.0117

(0.0833) (0.0759)Not Employed 0.0892** 0.0735*

(0.0431) (0.0383)Table C: MenInformal 0.0449 0.0475

(0.0606) (0.0659)Formal 0.0041 0.0575

(0.0876) (0.1057)Wage Earners 0.0189 0.0055

(0.0438) (0.0466)Not Employed 0.1442 0.1491

(0.1544) (0.1426)

Dependent variable:


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.

Expanding Access to Finance and Entrepreneurial Activity: Evidence from Mexico. Miriam Bruhn Inessa Love May, 2009.

Documents

time slide

bank status slide

different bank slide

concern slide

impact of azteca

banco azteca branches

bank account banco azteca

bank branches