Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts
18 Jul 2006, Karlan, D. & Zinman, J.

Would liberal loan screening criteria help in expanding credit access?

This paper puts forth the argument that consumer credit expansions can be welfare improving. It documents the work of the authors with a South African lender, who conducted a field experiment to assess the impacts of liberalizing their credit screening.

The authors aimed to answer the following three questions:

• Do credit constraints really bind?
  
• Does a relaxing credit constraint actually benefit marginal borrowers?
  
• How much do lenders profit or lose from making marginal loans?

The paper presents the following features of the authors' experiment:

• It was implemented in a high-rate, high risk South African consumer credit market, where credit constraints seemed binding;
  
• The authors asked the cooperating lender to randomly approve some consumer loans and randomly reject others;
  
• The survey measured borrowing activity, loan uses and a range of proxies for house-hold well-being.

They found that:

• There were binding liquidity constraints;
  
• Relaxing credit constraints produced tangible benefits by enabling consumers to make productive investments and smooth consumption;
  
• Marginal loans were profitable for the lender;
  
• Liberalized screening criteria can benefit both borrowers and spenders.

In conclusion, the authors state that:

• Lenders can hone in on their sustainability/outreach frontier by taking controlled risks using randomized experimentation;
  
• There is a role for welfare-improving interventions in consumer credit markets, but with certain caveats.

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Publisher(s):
Yale Economic Growth Center

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