Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts

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.