From Pawn Shops to Banks: The Impact of Formal Credit on Informal Households

This paper examines the effects of expanding access to credit on the decisions and welfare of households.  It focuses on the entry of Banco Azteca, the first bank in Mexico targeting households from the informal sector. The paper uses panel data at the household level to analyze savings and consumption patterns before and after the entrance of Banco Azteca. To estimate the impact of the bank's entry, the paper developed a dynamic model of household choices in which the bank endogenously selected the municipalities for branch openings. Findings based on the analysis include:

• The comparison of household outcomes from municipalities where the bank opened with other municipalities suggests that households, especially those employed in the informal sector, experienced significant changes in their savings, credit, and consumption patterns;
• Households in municipalities in which the bank entered were better able to smooth their consumption and accumulate more durable goods;
• Households increased their bank credit usage and decreased loans from other more expensive suppliers, such as pawn shops;
• An analysis of municipalities with presence of Azteca branches showed that the use of savings as a buffer on income fluctuations declined once formal credit was available.