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

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.