Results and mechanisms
Importantly, our results are driven exclusively by the group of banks that target informal workers, known as cajas. Unlike traditional banks, these informal oriented banks are a large group of small and risky banks that operate in a highly competitive environment. What actions do these banks take to generate the effect of centrality on the probability of receiving credit? We find evidence that informal oriented banks use family ties as a strategy to reach the unbanked. They bring the unbanked into the virtuous lending loop through two channels: (i) the perk mechanism and (ii) the reputation transfer mechanism.
First, the perk mechanism consists of banks providing credit to first time borrowers who are family members of clients, to retain the latter.. To explore this mechanism, we exploit that several individuals have open loans in more than one bank. Our evidence suggests that they stay longer in the bank that provides a first loan to a family member. The probability of having a positive balance is larger in this bank and it happens only once the credit is issued.
Second, the reputation transfer mechanism consists of banks inferring the first time borrowers’ ability to pay from their relatives’ reputation. . We find that “family reputation” ends up being a good predictor of the future behavior of an individual who receives credit for the first time.
In sum, we find evidence that informal oriented banks exploit family networks to bring individuals with more connected families into the virtuous lending circle. We believe that our research opens new questions. For instance, do banks in other regions, including developed countries, also use family networks to substitute the lack of hard information on those who are engaged in informal activities? If not, could they use family networks in the future? The fact that banks with characteristics similar to those we label here informal oriented banks partially serve both the informal sector and minorities suggests that this may indeed be the case.
1 Technically, we run a regression with individual fixed effects. We also control for possible aggregate sources of variation coming from banks, districts, and time, by using a full set of interacted district, bank, and quarter fixed effects.
