Financial Inclusion and Contract Terms: Experimental Evidence from Mexico


Woman counting money
Aprajit Mahajan (UC Berkeley)
Friday 5 October 2018 at 3:00 - 4:30 pm (Hong Kong time, GMT +8)
Conference Room 6045, 6th floor, Lee Shau Kee Business Building, HKUST

Live Broadcast

Event Summary

There is a growing body of work linking financial development to improved economic outcomes and some evidence that shows that this relationship is causal. In response, developing country governments and international development institutions have made financial inclusion a key policy priority. The World Bank estimates that 60 percent of adults in developing countries do not use any formal financial services and has called for Universal Financial Access by 2020. In Mexico, a 2011 presidential decree established the National Council for Financial Inclusion to expand financial access to underserved populations. Aprajit Mahajan (UC Berkeley) gave an academic seminar on the role of large formal financial institutions in expanding financial access in developing countries.

Mahajan and coauthors examine a large Mexican bank’s efforts at expanding financial access with a credit card specifically targeted towards borrowers with limited credit histories. They focus on uncollateralized credit card debt which is the most common formal borrowing instrument in the country, from a credit card targeted at “new to banking borrowers” (NTB borrowers). In 2010, this card accounted for approximately 15% of all first-time formal sector loan products nationwide. They used bank data, credit bureau data, social security data and survey data to document market facts that are relevant for understanding the challenge of financial inclusion in Mexico.

Mahajan showed that NTB borrowers were credit constrained in the formal credit market and that informal credit market terms were markedly more onerous than formal sector terms. Despite this, they found high card exit rates, around one-third of the sample defaulted or cancelled their card over the 26-month study period. Large experimental changes in interest rates and minimum payments did little to mitigate default risk. Using payment and purchase data, they also found that bank revenue per card was low and highly variable. What’s more, NTB borrowers who generate good credit histories with their first lender, were more likely to obtain other cards and leave the bank compared to borrowers who do not generate comparable histories. Mahajan argued that these results were the reason for the bank’s eventual discontinuation of the card. These findings highlight the difficulty of increasing financial access using large formal sector financial organizations.

Presentation Slides

About the Speaker

Aprajit Mahajan is a professor in the Department of Agricultural and Resource Economics at UC Berkeley. His research has been in the fields of econometric theory, development and applied econometrics. His past studies have looked at child nutrition, financing bednet provision, and firm management in India.

This academic seminar is co-organized with the Department of Economics, HKUST. 

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