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Financial ( Dis -)Information and Disclosure: Experimental Evidence from Mexico A Xavier Giné World Bank G20 Meeting, M

Financial ( Dis -)Information and Disclosure: Experimental Evidence from Mexico A Xavier Giné World Bank G20 Meeting, Moscow. Motivation. Access to financial services is limited in developing countries ( Demirguc-Kunt and Klapper , 2012). Several explanations have emerged

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Financial ( Dis -)Information and Disclosure: Experimental Evidence from Mexico A Xavier Giné World Bank G20 Meeting, M

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  1. Financial (Dis-)Information and Disclosure: Experimental Evidence from Mexico A Xavier Giné World Bank G20 Meeting, Moscow

  2. Motivation • Access to financial services is limited in developing countries (Demirguc-Kunt and Klapper, 2012). • Several explanations have emerged • Transactions costs, asymetries of information, financial illiteracy • Poor quality of the product • Evidence of repayment problems and hidden charges in credit and savings products among low-income households in Mexico • Savings: Hidden fees yield negative effective rate • Credit: Many regulated and unregulated institutions, with large variation in total cost of credit.

  3. Motivation • In 2009, new requirements for disclosure formats and pricing transparency through modifications to the Law for Transparency and Regulation of Financial Services • Required that consumers be presented with key financial terms. • Yet, problems persist, and it is unclear whether these disclosure modifications are effective • Fung, Graham and Weil ‘s “Full Disclosure” book

  4. Example: Credit

  5. Example: Credit CAT= 107% CAT= 267%

  6. Example: Savings

  7. Example: Savings

  8. Why aren’t financial products transparent? • Financial products are inherently complicated • But then firms would have an incentive to make simpler products or to provide information • Is government intervention needed in this case? • Firms purposefully make products more complicated to maximize profits • Firms make more money when pricing is not transparent • In this case, firms will resist transparency initiatives

  9. What do we do? • Implement two studies to answer the following questions: • What is the quality of information provided to low-income customers interested in savings and credit products? • Does information vary by the type of consumer? • Are financial institutions complying with the new transparency rules? Are they offering the cheapest products that meet the customer needs? • How effective are disclosure forms?

  10. Study 1: Audit Study • Trained low income “shoppers” interested in credit and savings products visit financial institutions to assess the (quantity and quality of) information provided by the staff • Savings Scripts differed along: • Specific savings needs: 5000 Pesos (USD 385) in a Checking account or Fixed Term deposit. • Credit Scripts differed along: • Over indebtedness: Asked for a loan representing 20% or 70% of their household income.

  11. Audit Study • Both Scripts differed along: • Financial Literacy: Neophytes and Experienced • Awareness of Competition: Among experienced shoppers, half mention a previous high interest rate offer, the other half mentioned a low interest rate. • Formal dress: Shoppers were encouraged to dress formally on alternate interactions with the lender.

  12. Setup • Collaborative effort with CONDUSEF, member of the National Council for Financial Inclusion • 4 towns near DF, with population between 30,000 and 50,000 habitants, predominantly from the low-middle income socio-economic group. • 26 FIs (regulated and not) have presence • Commercial Banks, Low income banks, SOFOMS, SCAPS and SOFIPOS

  13. Setup • Savings • 4 professional auditors made 7 visits each to different institutions in each town for a total of 112 visits. • Credit • 18 trained low-income individuals had 115 interactions and 215 visits (each interaction could have up to 4 visits). • After each visit, auditor had to fill in a questionnaire, validated via audio recording.

  14. Summary of Results • Staff tends to disinform potential clients, especially neophytes • Yet, experienced shoppers rate the staff higher • In general, staff cannot explain key terms such as GAT and CAT • Misalignment of incentives between staff and potential client • Staff adjusts correctly loan size but client typically ends up with more expensive credit and savings products

  15. Conclusion and Caveats • The study covers only one region of one country • Need replication to other contexts • Disclosure and transparency policies are difficult to implement successfully because FIs have a strong incentive to undo them • They are insufficient for debiasing customers

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