Towards a New Measure of Access to Credit

This brief outlines a methodology for measuring household access to credit that is based on the credit limit concept.

The paper argues that:

• From the borrower's view, the limit on the supply of credit is not the maximum the lender is able to lend, but the maximum the lender is willing to lend;
• The extent of household access to credit is the maximum limit or credit limit that the borrower cannot exceed when borrowing, regardless of how much interest he is willing to pay;
• The credit- limit variable, "b-max", facing a potential borrower, and the amount the potential lender wants the borrower to repay are the variables that the lenders can choose;
• The optimal amount b* that the borrower can borrow within the range that the lender has set, is the choice of the borrower;
• b-max depends upon the maximum the lender is able to lend as well as the lender's assessment of the likelihood of default and other borrower characteristics.

The brief concludes that:

• The maximum credit limit for a borrower depends on both the lender's and borrower's characteristics and actions;
• It also depends on random events that affect the fortune of lenders and other potential borrowers;
• The borrower can therefore only form "expectations" about the likely value of b-max at the time of borrowing;
• The borrower's expectations of b-max are therefore much more important in determining the amount of credit that the borrower actually demands.