The Impact of Access to Credit on the Saving Behavior of Microentrepreneurs: Evidence from 3 Latin American Countries

Since microcredit started to appear on a significant scale 25 years ago, there has been a continual debate about its welfare effects on low-income entrepreneurs. Is it as beneficial as many claim - creating opportunities for increased income generation - or does it tend to create a debt-trap that in the end serves to impoverish the borrowers?

Standard models of saving behavior indicate that total savings will fall as a result of improved access to credit. Not only will the precautionary saving motive be mitigated, but accumulation of savings for investment, household purchases or social events becomes less important.The econometric analysis in this paper, based on data from IDB evaluations of its MSE Global Programs in Ecuador, El Salvador and Paraguay, yields another result:

• Increased access to credit induces borrowers to shift their savings from livestock, jewelry and other assets with low or negative returns into deposit accounts with positive returns;
• This shift takes place as microentrepreneurs develop an understanding of, and confidence in, the various operations and services of the financial sector;
• As a result of this shift, borrowers tend to achieve a better return on their savings.

Overall the paper concludes that shifting savings into deposit accounts has welfare and policy implications. Not only is it beneficial to the microentrepreneurs themselves, but their increased access to regular financial services also contributes to the depth and liquidity of financial markets, which are important for the country as a whole.