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Credit Markets for the Poor
Access to credit is an important means of providing people with the opportunity to make a better life for themselves. Loans are essential for most people who want to purchase a home, start a business, pay for college, or weather a spell of unemployment. Yet many people in poor and minority communities―regardless of their creditworthiness―find credit hard to come by, making the climb out of poverty extremely difficult. How dire are the lending markets in these communities and what can be done to improve access to credit for disadvantaged groups? In Credit Markets for the Poor, editors Patrick Bolton and Howard Rosenthal and an expert team of economists, political scientists, and legal and business scholars tackle these questions with shrewd analysis and a wealth of empirical data. Credit Markets for the Poor opens by examining what credit options are available to poor households. Economist John Caskey profiles how weak credit options force many working families into a disastrous cycle of short-term, high interest loans in order to sustain themselves between paychecks. Löic Sadoulet explores the reasons that community lending organizations, which have been so successful in developing countries, have failed in more advanced economies. He argues the obstacles that have inhibited community lending groups in industrialized countries―such as a lack of institutional credibility and the high cost of establishing lending networks―can be overcome if banks facilitate the community lending process and establish a system of repayment insurance. Credit Markets for the Poor also examines how legal institutions affect the ability of the poor to borrow. Daniela Fabbri and Mario Padula argue that well-meaning provisions making it more difficult for lenders to collect on defaulted loans are actually doing a disservice to the poor in credit markets. They find that in areas with lax legal enforcement of debt agreements, credit markets for the poor are underdeveloped because lenders are unwilling to take risks on issuing credit or will do so only at exorbitant interest rates. Timothy Bates looks at programs that facilitate small-business development and finds that they have done little to reduce poverty. He argues that subsidized business creation programs may lure inexperienced households into entrepreneurship in areas where little profitable investment is possible, hence setting them up for failure. With clarity and insightful analysis, Credit Markets for the Poor demonstrates how weak credit markets are impeding the social and economic mobility of the needy. By detailing the many disadvantages that impoverished people face when seeking to borrow, this important new volume highlights a significant national problem and offers solutions for the future.
314 pages, Hardcover
First published July 31, 2005
10 people want to read
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January 2, 2011
Relevant!
“In surveys of payday loan customers and in focus groups, the customers commonly report that they find a number of features of the loans attractive (Elliehausen and Lawrence 2001; Wilson 2002). They like the fact that there is no traditional credit check. They like the fast loan structure and disbursal. They like the closed-end, short-term structure of the loan because they think this meets their needs and reduces the chances that they will incur a long-term debt-service burden. They view the loan as much more convenient and respectable than a pawn-shop loan since they do not have to leave collateral in the possession of the lender. Customers consistently report that they do not like the high cost of the loans.” P. 20
In a study of a bank sponsored program to improve online banking rates among the poor, they looked at rates of these indicators among participants. Relevant for a "Are we reaching our target?" internal audit?
Female. Hispanic. Non-Hispanic white. Non-Hispanic black. Married. Number of adults in household. Number of children in household. Single parent. Less than twelve years of education. Twelve years of education. Did not work last year. Worked full-time last year. Annual Earnings. Missing earnings information. Total household income. Received public assistance. Has checking account. Has savings account. Has stocks, bonds, mutual funds. Has credit card. Banks online. Banks by phone. Uses debit card. Saves money each month. Always uses monthly budget. Always pays bills on time. Pays credit card balance each month. Knows mutual funds have risk. Knows how to minimize credit card interest. Uses internet often. Uses internet sometimes.
response from participants to costs: p.61 (boring excerpt but i may need it as ammo as we restructure our business model)
"The LMI individuals the Program targeted are very sensitive to cost. One participant said she has not replaced her printer cartridge because they are too expensive ($30 to $40). Another said that she could not find the cartridges in her neighborhood, and that it was hard for her to get a ride to the store that carried them. This story begins to reveal the complexity of the lives of low-income urbanites and how comprehensive a program must be to be effective. We confronted the transportation issue ourselves on one of the days we held our focus groups. The weather was very cold with freezing rain and snow was predicted. As we made calls the morning of the focus groups to remind people to attend, several told us they were unable to make it out because of the weather and their lack of transportation options.
Other participants have come to the end of their year of free Internet service and do not know if they can afford to pay for it themselves. Some expressed concern about the fees they would have to pay to continue banking online (as part of the program they received free access to the Bank's online banking site for only one year). Although online banking is inexpensive for banks, it is relatively expensive for consumers who may not otherwise use high-speed Internet services because of the associated fees. Sophisticated online banking software is cumbersome with a dial-up connection. One participant noted that there were other computer classes available at the CBO [community based organization), but that they cost money, and she could not afford them - she believed she would have benefited from more free training."
selling the workshop p. 64
"Those who are using the Bank's electronic banking website find that electronic banking helps them pay their bills on time. One participant said that it "keeps me organized." Another noted that it "made it easier for me to look at my spending by seeing my statements online." Others echoed this sentiment that the visual aspect of electronic banking was key. For example, "I feel like I have more control of my money because I can see it.""Now I know where my money is, and how much I have to play with. I don't carry cash anymore." Yet another liked that she "could easily tell when a bill was paid" although she didn't realize it might take five days to get to the payee and it would help if they could speed that up."A few participants are very happy with the enhanced website, which they find easier to use. There is some anecdotal evidence that learning the budgeting software is enabling participants to think differently about money and begin to save. One participant explained, "I do have money. I save more now because I can see it."One of the CBO trainers said that in the classes on financial literacy she saw, "lightbulbs going off. They were seeing how they could make adjustments and begin to save. These tools are helping them to make better choices, and nobody else is giving them these tools. They are learning that saving even $25 a month will make a difference."This trainer told us she could see the value added of this target group having computers and using them for their finances.
Others said that being able to transfer money from one account to another online enabled them to avoid costly fees and because it helped them avoid bouncing checks. Going through the program has generally made participants more comfortable with technology, and particularly with online banking. Said one CBO staff member, "everyone was so afraid of it, and now they realize there's nothing to it."
At the same time, some participants had had negative experiences that made them even more reticent about trusting the technology. For example, one participant relayed that she had tried to set up her account to pay bills while she was on vacation; she returned to find that several checks had bounced. Although she was able to negotiate with the Bank to get fees reduced, she is now "scared to go back and try it again."
and p.67
"First, technology does appear to be a draw for this population. Participants who had had little or not experience with computers prior to this program felt that they were being "left behind"by not having access to technology. Participants not only appear to be using their computers for a variety of purposes, but these computers have also become household resources for other family members."
who is credit-constrained? p. 116
"We define a household as credit constrained if it responds positively to the question: "during the year did you or a member of your household apply for a loan to a bank or other financial intermediary and have the application partially or totally rejected?""
"From previous empirical works (see, for example, Hall and Mishkin 1982; Hayashi 1985; Zeldes 1989; Jappelli 1990; and more recently Duca and Rosenthal 1993), we have a clear picture on the individual characteristics of credit-constrained households in United States. Younger and single consumers with lower wealth and lower income are more likely to be credit rationed. Level of schooling, employment status, and sex are not significant, while marital status and race are: being married or white decreases the probability of being credit constrained."
uh oh. p. 149
"Scholarly studies have failed to demonstrate that small-business ownership in the United States today is an effective strategy for bootstrapping one's way out of poverty. Thin empirical data coexist with numerous stereotypes about self-employment, particularly regarding the experiences of poor Americans who create small businesses (Bates 1997a). Hard data on small business dynamics are rare: this study focuses on the hard data."
"Mainstream literature on entrepreneurship stresses that education, skills, and work experience are prerequisites for aspiring entrepreneurs, be they poor or affluent. Beyond human capital prerequisites, small firm formation often requires financial investment to acquire the tools of the trade. Most new businesses must invest in inventory, equipment, and the like if they are to achieve viability. Working capital is usually needed to finance day-to-day operations. Absent appropriate human and financial capital investments, hard work and initiative alone are often not enough to create lasting firms.
Outcomes of Equal Opportunity Loan program p. 152
"The EOL loan program was in a paradoxical state: the strongest loan recipients often succeeded in business but these borrowers came from mid-to-high-income groups. The truly disadvantaged loan recipients, while clearly eligible, failed in droves."
damning. p. 164
"What the Good Faith Fund model shows, and what I believe a careful analysis of other U.S. adoptions of the Grameen-like program would show, is that they work best not with those who are long term on welfare, but those who have a history of holding jobs and have well-defined skills. When Good Faith Fund borrowers succeed, it is because they are members of low to moderate income families where somebody already has a job and the Good Faith Fund microbusiness loan provides additional or supplemental income. (Taub 1998, 67-68).
differences in start up capital among entrepreneurs p. 192
"to illustrate the economic effect of regression coefficients in the pooled Chatham-Little Village sample, we calculated estimated levels of start-up funding for each ethnic group using the following baseline characteristics: eating-drinking place, high school education, proficient in English, no previous experience as an owner, thirty-seven years old, male, and business started twelve years ago. The estimated start-up cost for a Hispanic owner with these baseline characteristics is $20,414. For owners in the other groups, the estimated costs are: $11,104 for blacks, $54,564 for whites, $26,921 for Asians, and $30,479 for others."
"Highlighting the importance of personal savings, 55 percent of black owners, 51 percent of Hispanic, and 45 percent of Korean in the sample started their businesses using only personal savings. By comparison, only 19 percent of white owners did."
Why are microcredit programs struggling in developed companies? p.200
"Based on an extensive review of experiences in developed countries, Emanuele Massetti and Loic Sadoulet (2003) identify four factors that affect the success of programs: product design and methodology, efficient processing and delivery infrastructure, a sufficient range of product and services to generate sufficient revenue, and institutional credibility. In most failed attempts, the institutions have fallen short on at least one of those dimensions."
one i've been thinking about...
"financial institutions that do not fall under national banking regulations - as is the case for most NGOs that start microcredit programs - are forbidden to provide savings or insurance products, thus limiting the revenue-generating opportunities for institutions."
repayment incentives p.205
"Genesis created repayment incentives by making access to future loans conditional on repayment behavior. Genesis uses a "three strikes and you're out" rule: one late payment resulted in no increase in loan size; two late payments reduced the loan size; and three late payments within the past twelve months resulted in permanent exclusion from any further loan."
"Repayment strategies are governed by borrowers' ability and willingness to repay... Willingness to repay thus depends on the value they place on future loans. The value of future loans is influenced by the size of future loans (that is, the growth rate of loans), but also by a borrower's perspective of future expected returns and alternatives."
the argument for repayment insurance p. 220
"This contract is simple to implement in that no new information is required. It certainly improves welfare given that building reputation is less costly than building savings. It also transfers credit risk from poor individuals to a better diversified and less risk-adverse institution and allows the institution to cover shocks that are beyond the capacity of joint-liability groups to absorb through mutual help arrangements. The insurance contract is also beneficial for the financial institutions, since it is complementary to their lending activity: insurance allows institutions to keep experienced borrowers who suffer unforeseen shocks, whereas defaulting borrowers would have had to have been excluded from further loans under the existing loan rules."
individual vs group lending p.229
"Anecdotal and some econometric evidence suggest that NGOs offering individual loans have a better record of funding businesses that grow than group lenders do."
“In surveys of payday loan customers and in focus groups, the customers commonly report that they find a number of features of the loans attractive (Elliehausen and Lawrence 2001; Wilson 2002). They like the fact that there is no traditional credit check. They like the fast loan structure and disbursal. They like the closed-end, short-term structure of the loan because they think this meets their needs and reduces the chances that they will incur a long-term debt-service burden. They view the loan as much more convenient and respectable than a pawn-shop loan since they do not have to leave collateral in the possession of the lender. Customers consistently report that they do not like the high cost of the loans.” P. 20
In a study of a bank sponsored program to improve online banking rates among the poor, they looked at rates of these indicators among participants. Relevant for a "Are we reaching our target?" internal audit?
Female. Hispanic. Non-Hispanic white. Non-Hispanic black. Married. Number of adults in household. Number of children in household. Single parent. Less than twelve years of education. Twelve years of education. Did not work last year. Worked full-time last year. Annual Earnings. Missing earnings information. Total household income. Received public assistance. Has checking account. Has savings account. Has stocks, bonds, mutual funds. Has credit card. Banks online. Banks by phone. Uses debit card. Saves money each month. Always uses monthly budget. Always pays bills on time. Pays credit card balance each month. Knows mutual funds have risk. Knows how to minimize credit card interest. Uses internet often. Uses internet sometimes.
response from participants to costs: p.61 (boring excerpt but i may need it as ammo as we restructure our business model)
"The LMI individuals the Program targeted are very sensitive to cost. One participant said she has not replaced her printer cartridge because they are too expensive ($30 to $40). Another said that she could not find the cartridges in her neighborhood, and that it was hard for her to get a ride to the store that carried them. This story begins to reveal the complexity of the lives of low-income urbanites and how comprehensive a program must be to be effective. We confronted the transportation issue ourselves on one of the days we held our focus groups. The weather was very cold with freezing rain and snow was predicted. As we made calls the morning of the focus groups to remind people to attend, several told us they were unable to make it out because of the weather and their lack of transportation options.
Other participants have come to the end of their year of free Internet service and do not know if they can afford to pay for it themselves. Some expressed concern about the fees they would have to pay to continue banking online (as part of the program they received free access to the Bank's online banking site for only one year). Although online banking is inexpensive for banks, it is relatively expensive for consumers who may not otherwise use high-speed Internet services because of the associated fees. Sophisticated online banking software is cumbersome with a dial-up connection. One participant noted that there were other computer classes available at the CBO [community based organization), but that they cost money, and she could not afford them - she believed she would have benefited from more free training."
selling the workshop p. 64
"Those who are using the Bank's electronic banking website find that electronic banking helps them pay their bills on time. One participant said that it "keeps me organized." Another noted that it "made it easier for me to look at my spending by seeing my statements online." Others echoed this sentiment that the visual aspect of electronic banking was key. For example, "I feel like I have more control of my money because I can see it.""Now I know where my money is, and how much I have to play with. I don't carry cash anymore." Yet another liked that she "could easily tell when a bill was paid" although she didn't realize it might take five days to get to the payee and it would help if they could speed that up."A few participants are very happy with the enhanced website, which they find easier to use. There is some anecdotal evidence that learning the budgeting software is enabling participants to think differently about money and begin to save. One participant explained, "I do have money. I save more now because I can see it."One of the CBO trainers said that in the classes on financial literacy she saw, "lightbulbs going off. They were seeing how they could make adjustments and begin to save. These tools are helping them to make better choices, and nobody else is giving them these tools. They are learning that saving even $25 a month will make a difference."This trainer told us she could see the value added of this target group having computers and using them for their finances.
Others said that being able to transfer money from one account to another online enabled them to avoid costly fees and because it helped them avoid bouncing checks. Going through the program has generally made participants more comfortable with technology, and particularly with online banking. Said one CBO staff member, "everyone was so afraid of it, and now they realize there's nothing to it."
At the same time, some participants had had negative experiences that made them even more reticent about trusting the technology. For example, one participant relayed that she had tried to set up her account to pay bills while she was on vacation; she returned to find that several checks had bounced. Although she was able to negotiate with the Bank to get fees reduced, she is now "scared to go back and try it again."
and p.67
"First, technology does appear to be a draw for this population. Participants who had had little or not experience with computers prior to this program felt that they were being "left behind"by not having access to technology. Participants not only appear to be using their computers for a variety of purposes, but these computers have also become household resources for other family members."
who is credit-constrained? p. 116
"We define a household as credit constrained if it responds positively to the question: "during the year did you or a member of your household apply for a loan to a bank or other financial intermediary and have the application partially or totally rejected?""
"From previous empirical works (see, for example, Hall and Mishkin 1982; Hayashi 1985; Zeldes 1989; Jappelli 1990; and more recently Duca and Rosenthal 1993), we have a clear picture on the individual characteristics of credit-constrained households in United States. Younger and single consumers with lower wealth and lower income are more likely to be credit rationed. Level of schooling, employment status, and sex are not significant, while marital status and race are: being married or white decreases the probability of being credit constrained."
uh oh. p. 149
"Scholarly studies have failed to demonstrate that small-business ownership in the United States today is an effective strategy for bootstrapping one's way out of poverty. Thin empirical data coexist with numerous stereotypes about self-employment, particularly regarding the experiences of poor Americans who create small businesses (Bates 1997a). Hard data on small business dynamics are rare: this study focuses on the hard data."
"Mainstream literature on entrepreneurship stresses that education, skills, and work experience are prerequisites for aspiring entrepreneurs, be they poor or affluent. Beyond human capital prerequisites, small firm formation often requires financial investment to acquire the tools of the trade. Most new businesses must invest in inventory, equipment, and the like if they are to achieve viability. Working capital is usually needed to finance day-to-day operations. Absent appropriate human and financial capital investments, hard work and initiative alone are often not enough to create lasting firms.
Outcomes of Equal Opportunity Loan program p. 152
"The EOL loan program was in a paradoxical state: the strongest loan recipients often succeeded in business but these borrowers came from mid-to-high-income groups. The truly disadvantaged loan recipients, while clearly eligible, failed in droves."
damning. p. 164
"What the Good Faith Fund model shows, and what I believe a careful analysis of other U.S. adoptions of the Grameen-like program would show, is that they work best not with those who are long term on welfare, but those who have a history of holding jobs and have well-defined skills. When Good Faith Fund borrowers succeed, it is because they are members of low to moderate income families where somebody already has a job and the Good Faith Fund microbusiness loan provides additional or supplemental income. (Taub 1998, 67-68).
differences in start up capital among entrepreneurs p. 192
"to illustrate the economic effect of regression coefficients in the pooled Chatham-Little Village sample, we calculated estimated levels of start-up funding for each ethnic group using the following baseline characteristics: eating-drinking place, high school education, proficient in English, no previous experience as an owner, thirty-seven years old, male, and business started twelve years ago. The estimated start-up cost for a Hispanic owner with these baseline characteristics is $20,414. For owners in the other groups, the estimated costs are: $11,104 for blacks, $54,564 for whites, $26,921 for Asians, and $30,479 for others."
"Highlighting the importance of personal savings, 55 percent of black owners, 51 percent of Hispanic, and 45 percent of Korean in the sample started their businesses using only personal savings. By comparison, only 19 percent of white owners did."
Why are microcredit programs struggling in developed companies? p.200
"Based on an extensive review of experiences in developed countries, Emanuele Massetti and Loic Sadoulet (2003) identify four factors that affect the success of programs: product design and methodology, efficient processing and delivery infrastructure, a sufficient range of product and services to generate sufficient revenue, and institutional credibility. In most failed attempts, the institutions have fallen short on at least one of those dimensions."
one i've been thinking about...
"financial institutions that do not fall under national banking regulations - as is the case for most NGOs that start microcredit programs - are forbidden to provide savings or insurance products, thus limiting the revenue-generating opportunities for institutions."
repayment incentives p.205
"Genesis created repayment incentives by making access to future loans conditional on repayment behavior. Genesis uses a "three strikes and you're out" rule: one late payment resulted in no increase in loan size; two late payments reduced the loan size; and three late payments within the past twelve months resulted in permanent exclusion from any further loan."
"Repayment strategies are governed by borrowers' ability and willingness to repay... Willingness to repay thus depends on the value they place on future loans. The value of future loans is influenced by the size of future loans (that is, the growth rate of loans), but also by a borrower's perspective of future expected returns and alternatives."
the argument for repayment insurance p. 220
"This contract is simple to implement in that no new information is required. It certainly improves welfare given that building reputation is less costly than building savings. It also transfers credit risk from poor individuals to a better diversified and less risk-adverse institution and allows the institution to cover shocks that are beyond the capacity of joint-liability groups to absorb through mutual help arrangements. The insurance contract is also beneficial for the financial institutions, since it is complementary to their lending activity: insurance allows institutions to keep experienced borrowers who suffer unforeseen shocks, whereas defaulting borrowers would have had to have been excluded from further loans under the existing loan rules."
individual vs group lending p.229
"Anecdotal and some econometric evidence suggest that NGOs offering individual loans have a better record of funding businesses that grow than group lenders do."
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January 22, 2016A good, if slightly dated (published before the foreclosure crisis), overview of credit markets for the poor and various financial concepts that apply to them. The chapters that I found especially insightful and accessible to someone without and extensive background in economics were Chapter 1 (Fringe Banking and the Rise of Payday Lending), Chapter 4 (Mortgage Debt, Bankruptcy, and the Sustainability of Homeownership), Chapter 6 (Financing Disadvantaged Firms), and Chapter 7 (Networks and Finance in Ethnic Neighborhoods). A warning to my lefty friends – for the most part these articles do not approach their subject matter from an critical or economic justice-oriented perspective.
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September 26, 2014332.70869 C9129 2005
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