The impacts of microcredit on income poverty, labour and well-being : a quasi-experimental study in urban Mexico

• Main Author: Niño Zarazúa, Miguel Angel
• Published: University of Sheffield 2008
• Subjects: 337
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.489718

Mexico has undergone a drastic reform in financial markets that transformed the system from financial repression to financial liberalisation and yet, a large percentage of enterprising households, particularly at the bottom-end of the income distribution, remain excluded from institutional financing. In 2001, the Mexican government launched the National Programme for Financing the Microentrepreneur with the explicit objective of expanding access of poor households to credit, through capital subsidisation of microfinance organisations. The intervention was based on the proposition that the impacts of credit on income and well-being are positive and significant. In this thesis we test such a proposition in the context of urban poverty. One of the main challenges in analysing the impacts of credit emerges from the problems of self-selection and endogeneity that are related to the choice of borrowing. The very few studies that control for these estimation constraints employ methodologies that are restricted to rural areas. We propose an alternative quasi-experimental research methodology specifically designed to work in the urban context, where a large percentage of microfinance organisations in the developing world actually operate. We collected primary data from 148 households, members of three microfinance organisations that operate in shanty towns located to the Eastern periphery of the Metropolitan area of Mexico City. Although we find that credit has positive impacts on income poverty, the magnitude of the impacts is marginal and only significant at the upper thresholds of human deprivation, where the moderate poor are located. We find no evidence of impacts on extreme poverty. The empirical evidence reveals that rigid screening, incentive and enforcement devices that microfinance organisations exploit to mitigate moral hazard and adverse selection, generate a significant and increasing utility cost of borrowing that undermine the potential effects on poverty and well-being. We also find that these devices exacerbate micro-rationing in credit markets, leading to constrained Pareto inefficiency. In this sense, government interventions that go beyond the objective of expanding access to credit, and facilitate, through temporal subsidisation, technological and financial innovations, could improve market efficiency and benefit both lenders and borrowers.