Does use of formal and informal credit reduce poverty in rural Mexico?

Abstract

Motivation

Despite efforts to reduce poverty, both income and multidimensional poverty continue to be high in Mexico, especially in rural areas. Most studies concerned with the effect of credit use on poverty analyse formal credit, but little is known about the impacts of different types of credit on poverty.

Purpose

We investigate the impacts of the use of formal credit and informal loans obtained (primarily) for productive and investment purposes on multidimensional and income poverty of rural households in Mexico.

Approach and methods

We use data from the 2013 and 2015 CONEVAL Surveys of Rural Households in Mexico, representative of rural communities with fewer than 2,500 inhabitants, to investigate the impact of credit on poverty. We apply inverse probability of treatment weighting (IPTW) to account for differences between users of formal credit, users of informal loans, and non-users of credit.

Findings

Both formal and informal credit usage reduce poverty in rural Mexico, generally with clearer impacts on moderate rather than extreme poverty. Informal credit appears to have largely reached households that could most benefit from it. Broader access to formal credit would potentially further reduce poverty.

Policy implications

Public policies to reduce rural poverty should promote a greater access to the formal financial sector. Including vulnerable low-income rural households in formal finance should be accompanied by financial education.