Examining evidence of financial and credit exclusion in Canada from 1999 to 2005

Changes are occurring in the provision of consumer credit, including the expansion of subprime and some fringe financial services (e.g., payday lending). We link two existing literatures on credit constraint and financial exclusion to assess the impact of these developments on the financial circumstances of low and modest-income consumers. We develop a model that identifies observable measures of credit constraint and financial exclusion and relate them to consumer characteristics and life cycle behaviour. We estimate this model using the two latest Surveys of Financial Security for 1999 and 2005, which provide consistent evidence of credit constraint and financial exclusion through time. We find modest overlap among our measures of financial exclusion, which include a zero balance/no account, credit card refusal, and using a pawnshop. Probit regression is used to investigate the factors influencing the incidence of financial exclusion. The results are similar for 1999 and 2005 and indicate rising incidence of financial exclusion as income and wealth fall, although the relationship is nonlinear such that incidence rises much faster at very low levels of income and wealth. Our analysis also suggests potentially important links between financial literacy, formal education, asset building, and financial exclusion and credit constraint. When we combine the samples, we find statistically significant evidence of growth in the incidence of each indicator of financial exclusion when other factors are held constant. Policy implications may include the strengthening of banking regulations that affect low-income Canadians and the promotion of universal financial literacy.     

Perception and role of informal rural finance in developing countries: the example of Tanzania

Negative perceptions on the value of informal rural finance or credit which are prevalent in a number of developing countries are compounded in the case of Tanzania because of the country's Ujamaa and socialist policies. Consequently, informal rural finance has been neglected both in terms of research and policy planning. This paper attempts to fill part of the research gap on informal rural finance in Tanzania, and to contribute to the growing body of knowledge on this subject in the developing countries. The paper briefly investigates the policy and perception scenario on informal rural finance in Tanzania in the last two decades. Based on empirical data collected through village surveys in three regions of the country, the paper describes the sources of informal credit for smallholder farmers in those areas, and assesses the use, repayment, terms and conditions of such credit.     

SURVIVING CREDIT MARKET COMPETITION*

Empirical studies have documented that improvements in credit supply have important effects on entry in nonfinancial industries. This article shows that changes in credit supply conditions have much deeper effects on firms' population dynamics, well above and beyond the experience of entry. I explore the hypothesis that changes in credit supply have important effects on the demand side as well. I conjecture that when financial capital is difficult to obtain, while fewer firms may enter, those entering are drawn from a population with a better distribution of entrepreneurial quality. In an environment where financial capital is easily obtainable instead, the population of loan applicants changes as well, including those in a tougher environment who would not have tried entrepreneurship in the first place. These changes in the population of applicants imply significant effects on firms' life expectancy profile, and these effects are heterogeneous across firms of different vintage. Modifications in life expectancy are likely to affect firms' incentives in undertaking future capital investment and likewise investments in technological innovation. Hence, these changes in overall firms' population dynamics characterize an explicit mechanism through which finance can affect real economic activity. (JEL G21, L11, L16)     

College Students and Credit Card Use: The Role of Parents, Work Experience, Financial Knowledge, and Credit Card Attitudes

This study examined the influence of parental interactions, years of work experience, financial knowledge, credit card attitudes, and personal characteristics on college students’ credit card behaviors (i.e., number of cards and amount of debt). Based on data collected across seven universities (N = 413), we found that students who had parents who argued about finances, were juniors/seniors, and were comfortable making minimum payments were the most likely to have $500 or more in credit card debt and two or more credit cards. In addition, number of credit cards held was the only dependent variable influenced by gender and fear of credit cards. These results highlight the importance of early interventions in the life of college students including involving parents as positive role models.     

Alleviating poverty or reinforcing inequality? Interpreting micro‐finance in practice,with illustrations from rural China

Academic and political discussions about micro‐finance have been found lacking in predictive power, because they are based on orthodox economic theory, which does not properly comprehend the social components of credit. I take a better approach, utilizing credit theory – specifically, Ingham's explication of how the nature of money as credit leads to social inequality. I also expound the perspective that morality is not separate from considerations borrowers make in micro‐finance programmes on the micro level. I draw upon illustrations from my fieldwork in rural China, where a group‐lending micro‐finance programme was administered as part of a larger government‐initiated effort across the country.     

Credit Card Debt and the Provision of Financial Support to Kin in the US

Credit card debt stands at over $1 trillion in the US and grows continuously. Scholars have argued that high (and growing) levels of credit card debt are attributable in part to rising economic vulnerabilities, combined with a thinning public safety net, credit cards being increasingly employed to make ends meet in this context. This paper extends this line of work by stressing that individuals and households do not rely on their credit cards only to mitigate their own financial hardships, but also those experienced by their non-coresidential kin members. More specifically, building on the notion that kin networks can constitute a source of negative social capital, we argue that individuals often accumulate credit card debt as they attempt to provide monetary assistance to their relatives in need. We also show that this effect is particularly strong in lower-income groups and in African American communities, in which need levels are especially high. Based on random and fixed effects analyses of data from the Panel Study of Income Dynamics, these insights extend scholarship on both kin networks of support and the sources of credit card debt.

     

FISCAL STRUCTURES AND ECONOMIC GROWTH: INTERNATIONAL EVIDENCE

Our paper systematically examines the effects of fiscal structure on economic growth. We find that for developing countries, debt-financed increases in government expenditure retard growth and tax-financed increases stimulate growth, while for developed countries, debt-financed increases in government expenditure do not affect growth and tax-financed increases lower growth. We impose the government budget constraint on the regression equations so that the precise changes in fiscal policy can be identified (e.g., the effect of a debt-financed increase in health expenditure), employing a pooled cross-section, time-series sample and fixed- and random-effect methods. (JEL 04, E6)     

SMALL‐ AND MEDIUM‐SIZED ENTERPRISE FINANCING AND SECURITIZATION: FIRM‐LEVEL EVIDENCE FROM THE EURO AREA

This paper analyzes the impact of securitization on access to finance for small and medium‐sized enterprises (SMEs) in the euro area. Using firm‐level survey data on SME financing conditions, we show that an increase in securitization issuance reduces the probability of SMEs facing credit constraints and decreases the costs of bank financing for nonconstrained firms. Our results reveal that in addition to the volume of securitization, its type and quality matter for credit extension to SMEs. The paper thus provides empirical support for recent initiatives to revive securitization in Europe and for effective monetary policy transmission in the euro area. (JEL D22, E44, E51, E58, G21)     

Expenditure Flows Near Widowhood

Using data from the 1980–2001 Consumer Expenditure Surveys, we investigate how impending widowhood affects households’ expenditure patterns. We find that total annual expenditures are $4,027 higher for about-to-be-widowed households compared to otherwise comparable continuously married couples. Within subcategories, expenditures average $4,108 higher for the miscellaneous subcategory which includes expenditures on funerals/burials. We conclude that differences in the needs-adjusted incomes of married and widowed households may be partly a function of pre-widowhood differences in their expenditure patterns that lead about-to-be-widowhood households to draw down on financial wealth.     

CREDIT COUNSELING AND CONSUMER CREDIT TRAJECTORIES

Nonprofit credit counseling provides consumers with financial education, individualized financial counseling, and debt restructuring. Despite potential benefits, relatively little is known about its efficacy. This study uses administrative data to assess the relationship between counseling and consumer credit outcomes. We estimate difference‐in‐difference models to analyze credit outcomes for a counseled group relative to a matched comparison group for six quarters after a baseline period. We find evidence of a substantial credit shock around the time of counseling. Post‐treatment, counseling is associated with a persistent reduction in debt even after accounting for bankruptcies, foreclosures, debt charge‐offs, or participation in debt consolidation programs. (JEL D12)     

Inequality and education decisions in developing countries

In this paper we analyze the effect of inequality on school enrollment, preferred tax rate and expenditure per student in developing countries; when parents can choose between child labor, public schooling or private schooling. We present a model in which parents make schooling decisions for their children, weighing the utility benefit of having a child with formal public or private education versus the forgone income from child labor or household work. Parents vote over the preferred tax rate to finance freely provided public education. The utility benefit of an educated child is proportional to expenditure per student, so that there is congestion in public school. We find that when parents can send their children to work or to private school, high inequality leads to exit from public education at both ends of the income distribution. Thus high inequality reduces the support for public education, leading to a low tax rate and expenditure per student. Exit from public education results in both high child labor and a large fraction of students attending private school. In fact there is a threshold level of inequality above which there is no longer support for public education. In addition we explore the implications for the design of foreign aid. The results suggest that foreign aid policies should focus on promoting school attendance rather than increasing school resources, as the later policy might be offset by a reduction in the recipient country’s fiscal effort, with little impact on outcomes.      

WHAT IS HAPPENING TO THE IMPACT OF FINANCIAL DEEPENING ON ECONOMIC GROWTH?

Although the finance‐growth relationship is now firmly entrenched in the empirical literature, we show that it is not as strong in more recent data as it was in the original studies with data for the period from 1960 to 1989. We consider several explanations. First, we find that the incidence of financial crises is related to the dampening of the effect of financial deepening on growth. Excessive financial deepening or too rapid a growth of credit may have led to both inflation and weakened banking systems which in turn gave rise to growth‐inhibiting financial crises. Excessive financial deepening may also be a result of widespread financial liberalizations in the late 1980s and early 1990s in countries that lacked the legal or regulatory infrastructure to exploit financial development successfully. However, we find little indication that liberalizations played an important direct role in reducing the effect of finance. Similarly, there is little evidence that the growth of equity markets in recent years has substituted for debt financing and led to a reduced role of financial deepening on growth. (JEL E44, G10, O40)     

THE WELFARE EFFECT OF ACCESS TO CREDIT

I present a model in which credit and outside money can be used as means of payment in order to analyze how access to credit affects welfare when credit markets feature limited participation. Allowing more agents to use credit has an ambiguous effect on welfare because it may make consumption‐risk sharing more inefficient. I calibrate the model using U.S. data on credit‐card use and show that the increase in access to credit from 1990 to the near present has had a slightly negative impact on welfare. (JEL E51, E41)     

Understanding and knowledge of credit cost and duration: Effects on credit judgements and decisions

Financial capability requires understanding measures of consumer credit cost and using them appropriately in credit judgements and decisions. In three studies, UK adults’ understanding and use of credit cost and duration information were investigated from a bounded rationality perspective. Study 1, part of a representative survey of UK adults (N = 1000), found that when presented with annual percentage rate (APR) participants significantly overestimated the total cost (TC) of a 12-month loan. In Study 2, loan duration and APR were varied in an independent groups experiment (N = 242). Bank customers’ TC estimates were sensitive to both loan duration and APR but TC was again substantially overestimated. Study 3 was an independent groups experiment investigating the effect of APR and TC information on credit decisions (N = 241). APR often influenced decisions between loans varying in duration and monthly repayment, but this effect was moderated by TC information. It was concluded that: (1) people generally misunderstand the relation between APR and TC; and (2) although APR information can have a large effect on credit decisions, its effect is either attenuated or amplified by TC information. The findings are interpreted in terms of a ‘take the best APR’ heuristic and a dual mental account model of instalment credit. Recommendations for improving credit information provision and financial education are offered.     

NUMERACY AND ON-THE-JOB PERFORMANCE: EVIDENCE FROM LOAN OFFICERS

We examine how the numeracy level of employees influences their on-the-job performance. Based on an administrative dataset of a retail bank we relate the performance of loan officers in a standardized math test to the accuracy of their credit assessments of small business borrowers. We find that loan officers with a high level of numeracy are more accurate in assessing the credit risk of borrowers. The effect is most pronounced during the precrisis credit boom period when it is arguably more difficult to pick out risky borrowers. (JEL G21, J24)     

Besoins individuels et collectifs: Nanacatlan,Mexico

The author intends both to describe a native credit institution in a peasant community and to analyse its overt and covert functions. The community fund, managed by the local authority (presidencia auxiliar) is theoretically available to all household heads who can show solvency (e.g., by pawning a piece of property, usually land). Apart from assisting peasants who face a shortage of cash, another overt function of the system is to finance, with the interests which are paid back on the loans, the functioning of the local administration. Because of the great economic discrepancies between peasants (50 per cent of them own no land, while 2.5 per cent own 30 per cent of the land) one real, although covert, function of the credit institution is to channel a substantial amount of cash to the local upper class (which has little access to banking facilities). Therefore it actually enhances their economic domination over the majority of villagers, which fact allows us to understand the strict control they have exerted over the management of the fund since its foundation, some 40 years ago.     

Financing low-income housing in South Africa: Borrower experiences and perceptions of banks

South Africa is facing a low-income housing crisis, with the current backlog estimated at over three million units. An obstacle in the provision of low-income housing is the difficulty encountered by commercial banks to extend loans in this market despite supporting initiatives by Government. A lack of knowledge on the borrowing behaviour, preferences and experiences of low-income households in accessing housing finance from the commercial banking sector in South Africa hampers an understanding of the reasons for these problems. This paper's contribution is to provide information on the experiences and perceptions of low-income borrowers in the housing market of South Africa, specifically in their dealings with commercial banks. Results from a survey of 653 households across five provinces of the country are provided. In the survey, a structured questionnaire was used to obtain information on the experiences and perceptions of low-income households about their access to credit and housing finance, their experience of banks, the successes in credit approval, their judgements on the suitability of banks’ home-loan products, as well as preferences with regard to prices and interest rates.     

WHY DO PEOPLE USE DEBIT CARDS: EVIDENCE FROM CHECKING ACCOUNTS

Debit cards are the fastest growing consumer payment method despite being more expensive and less versatile than credit cards. In this paper, we investigate some of the oft cited explanations for debit card use. Checking account data shows that debit card use is correlated with age, pay frequency, overdrafting, and ATM use, but not income, gender, crime, or expenditure. The data contain some signs that debit cards might be used as a method of spending restraint. (JEL D14, G21, L14)