75715 DIME BRIEF The Economic Impact of Expanding Access to Finance in Mexico The Development Impact Evaluation Initiative is a broad-based World Bank Banco Azteca: A large-scale bank for program to generate knowledge on the low-income individuals in Mexico effectiveness of government programs. It Financial development is strongly associated with economic growth across supports government countries, and several recent studies have found a positive correlation agencies adopt a culture of real time evidence- between access to finance and poverty alleviation at the country level. based policy-making on However, these studies face severe identification issues, making it hard to the basis of rigorous establish a causal impact of increasing access to finance on economic impact evaluation. By outcomes. There is also little evidence on the channels through which finance testing how to make may help to reduce poverty. This policy brief presents the results from a study policies work, it of a unique bank operating in Mexico that allows for the evaluation of the contributes to improving effect of increased access to financial services for low-income individuals on policy performance. entrepreneurial activity, employment, and income. DIME works with 300 agencies in 72 countries The study examines the effects of opening Banco Azteca in October 2002. This across 15 thematic event was unique in that Banco Azteca opened branches in all of the pre- programs to generate existing stores of its parent company, Grupo Elektra, a large consumer goods knowledge, improve retailer. This allowed Banco Azteca to establish the second largest branch quality of operations and network in Mexico almost overnight, setting a world record in opening more strengthen country than 800 branches at once. capacity for evidence- based policy- making. An important feature of Banco Azteca was that it catered to low and middle This impact evaluation is income groups which had mostly been excluded from the commercial banking part of the DIME-FPD sector. Capitalizing on Grupo Elektra’s decades of experience in making small Impact Evaluation installment loans for its merchandize, its rich data, and its well-established Program and received information and collection technologies, Banco Azteca was uniquely generous support from positioned to target this segment of the population, which it estimated to the Knowledge for Change Trust Fund (KCP). comprise over 70% of all households. Many of these households were part of the informal economy – operating small informal businesses that lacked the documentation necessary for obtaining bank loans. The nature of Azteca’s operations, including low documentation requirements and motorcycle riding loan officers that come to the borrower’s house, as well as the size of the loans offered make it comparable to microfinance institutions that operated in Mexico at the time of Azteca opening. DIME Brief on Expanding Access to Finance in Mexico 1 2. Opening Banco Azteca led to a higher proportion of women working as wage- earners. This possibly signifies an expansion of labor market opportunities for women, from house makers to paid staff, perhaps in the informal businesses owned by their husbands or other male family members. Overall, total employment, including informal business owners and wage earners, rose by 1.5 percent for the complete sample. Note that the size of this effect is lower than the 3 percent Impact evaluation employment increase caused by a recent simplification of business registration regulation in Mexico (see Note 2 of the World Bank DECRG- The predetermined nature of the branch FP Finance and Private Sector Development locations – which were opened in all stores of Impact Series). A possible reason for this is that its parent company, Grupo Elektra – is used to the business registration reform led to an identify the casual impact of Banco Azteca increase in the number of formal businesses, as opening on economic activity through a opposed to informal businesses. difference-in-difference strategy. That is, the study compares the changes in outcome 3. The new bank opening increased income variables from before to after Azteca opening by about 9 percent for women and by about 5 across municipalities with and without pre- percent for men. existing Grupo Elektra stores at the time of the bank opening. The impact of this event on individuals’ employment choices and income Policy implications levels is studied using the Mexican Labor Market Survey, ENE. 1. Expanding access to finance to low income individuals can have a positive effect on economic activity. Impact evaluation results The study shows that the opening of Banco The three main findings of the study are: Azteca promoted the creation and survival of informal businesses. It also finds that this had a 1. The new bank opening increased the positive effect on the labor market, raising total proportion of working age adults who own employment. Average income also increased due informal businesses by 7.6 percent. to Banco Azteca opening. However, it had no effect on formal businesses. 2. Policies aimed at improving access to This is consistent with the anecdotal evidence finance to low income people might suggesting that Azteca targeted lower-income particularly benefit women. individuals and also with Azteca’s low documentation requirements. In contrast, Although the increase in informal businesses the formal business owners have easier access to study finds comes from male-run informal commercial bank credit, and likely prefer it businesses, women in the study are more likely because of higher interest rates charged by to become gainfully employed after Banco businesses is Azteca opening. Moreover, the income effects Azteca. The increase in informal www.worldbank.org/dime only significant for men. are largest for women. To contact the authors email mbruhn@worldbank.org and ilove@worldbank.org DIME Brief on Expanding Access to Finance in Mexico 2 3. Flexible lending practices can play an important role in expanding access to DIME-FPD: Development Impact Evaluation finance to low-income individuals. in Finance and Private Sector Development DIME-FPD is DIME’s new global program to support Banco Azteca has been able to lend to informal governments in getting answers, in real time, to their business owners by using alternative collateral most pressing questions in the areas of financial & requirements, such as co-signers and business services and regulatory & policy reforms. appliances (appraised during on-sight visits by Experts from the program’s high-level technical motorcycle riding loan agents). They have also advisory group work hand-in hand with Bank relied on credit information from repayment operations and in-country counterparts to design histories of appliance installment loans. and implement impact evaluations that respond to the projects’ operational learning needs. The Including these types of repayment histories in objective is to achieve better results by identifying credit bureaus could potentially support the what interventions work to deliver higher growth and growth of credit to low-income individuals. employment generation in the MSME (Micro, Small, and Medium Enterprises) sector. Programmatic activities: - Periodic workshops to build capacity for impact evaluation, share knowledge, and build a community of practice of policy makers and project teams for South-South learning - Technical advisory group to develop a coordinated learning agenda, conduct training, assure high quality standards, develop a common measuring framework and produce knowledge products In-country activities: - Technical advice to identify policy questions and design impact evaluations - Field-coordination and ongoing support for evaluation implementation, and data collection, management and analysis - Sharing of lessons learned DIME-FPD brings together 20 projects from 14 countries in 4 regions: Afghanistan, Brazil, Cape Verde, Egypt, Ethiopia, Jordan, Malawi, Mauritius, Mozambique, Nigeria, Senegal, South Africa, The Gambia, Togo, and Uganda. DIME-FPD partners: Abdul Latif Jameel Poverty Action Lab (J-PAL), Massachusetts Institute of Technology (MIT), Yale University, Innovations for Poverty Action Source: Bruhn, Miriam and Inessa Love (2009). (IPA), London School of Economics (LSE), Harvard Business School (HBS), Oklahoma State University, and “The Economic Impact of Banking the Unbanked: Agence Française de Développement, Evidence from Mexico.” World Bank Policy Research Working Paper 4981. DIME-FPD enjoys generous support from: the Gender Action Plan (GAP), Belgian / Luxemburg Poverty Policy note also published in the World Bank Reduction Partnership (BPRP/LPRP), Knowledge for Change Trust Fund (KCP) and the Russia Financial DECRG-FP Finance and Private Sector Literacy and Education Trust Fund. Development Impact Series: http://econ.world bank.org/programs/finance/impact www.worldbank.org/dime To contact the authors email mbruhn@worldbank.org and ilove@worldbank.org DIME Brief on Expanding Access to Finance in Mexico 3