Public policy challenge
Access to productive resources is an important means, however, many poor people lack the necessary capital to invest in higher education, consume without so many irregularities or to start a business. Expanding access to credit is a common means of enabling participation in the economy, and there is evidence that by expanding access to productive credit, the conditions of entrepreneurs and business owners are improved. However, there is less consensus on whether extending access to credit to support consumption helps borrowers, particularly when loans extend at high interest rates to highly risky clients.Context of the evaluation
Poverty in South Africa is widespread; approximately 57% of individuals lived below the poverty line in 2001. 1 While many poor areas could benefit from expanded access to credit to assist household consumption, there is evidence that microfinance institutions in South Africa offer funds primarily to the working class and small-scale business people. Informal lenders dominate the high-risk market segment, specifically the poor and the uneducated, charging interest rates between 30% and 100% per month.
The Cooperating Lender has operated for more than 20 years as one of the largest and most profitable micro-financiers in South Africa. It offers small loans at high interest rates for short periods of time, often to poor workers who have no collateral and must make payments on fixed dates.
Details of the intervention
This evaluation examined the impact of small consumer loans on household consumption, investment, wealth, education and well-being. The sample consisted of 787 loan applicants who had been rejected under the lender’s normal subscription criteria. The applicants were eligible if they had been rejected for not meeting the normal criteria of the lender, but they did not turn out to be notably insolvent judging from the loan officers. There is a double motivation to increase the offer of credit for the set of “marginal” applicants. First, it focuses on those who benefit most from the expansion of access to credit, called the poor without a bank.
A random portion of the eligible applicants were assigned a “second consideration” by the bank’s staff, who were encouraged, but not required, to approve the loan. Finally, loans were made to 53% of the applicants who had previously been rejected and who had been assigned to be examined again. Accepted applicants were offered an interest rate, a loan amount and a term based on the rules established by the Lender. Almost everyone received the standard contract for the first time: A 4 month term loan at an annual interest rate of 200%.
After the experiment, the applicants in the treatment and comparison groups were surveyed to examine their behavior and the results that could be affected by access to credit.Results and lessons of public policy
Impact for borrowers : It was discovered that by expanding access to credit, the well-being of borrowers is significantly increased. The economic self-sufficiency (employment and income) was higher for the applicants in the treatment group than for those in the comparison group, between 6 and 12 months after treatment. Twenty-six percent of treated households reported an improvement in food consumption. Subjective measures such as control over households, community status and general optimism also increased for the treatment group. The negative effects were depression and stress, another subjective measure of well-being.
Long-term impact : Over a horizon of 13 to 27 months, the results of the study also indicated a positive impact of owning a credit rating: having a score based on your credit history, increased the probability of being approved for a future loan in 19%, although there was no impact on the rating itself.
Profitability: It was found that offering loans to marginal applicants, which were initially rejected by the Lenders’ regular process, turned out to be profitable for the Lenders; although it is less profitable than offering loans to more solvent applicants. Car title loans riverside also offers loans to deserving and needy people on a very reasonable installments.