Small individual loans and mental health: a randomized controlled trial among South African adults

The intervention provided loan access to previously rejected loan applicants to a large cash credit Lender in South Africa. Applicants were eligible if they had been rejected under the Lender’s normal underwriting criteria but not found to be egregiously uncreditworthy. Accepted applicants were offered a loan at 4-month maturity and 200% APR. Loan repayment was monitored and enforced according to normal operations. Branch manager compensation was based in part on loan performance, and as noted above the experiment did not change incentive pay.

2004-09-01

2004-11-30

(1) Lender Profitability
(2) Credit scores
(3) Wellbeing: (a) Economic self-sufficiency (b) Food consumption (c) Investment (d) Physical health (e) Mental health (f) Outlook and control

(1) Lender Profitability: Marginal loan profitability compared to inframarginal loan profitability.

(2) Credit scores: probability of having a score if borrower previously did not have one, and change in score if borrower had one before.

(3) Well-being: (a) Economic self-sufficiency: income and employment status (b)Food consumption: anyone in the household experienced hunger in the past 30 days and whether the quality of food consumed by the household improved over the last 12 months (c) Investment: in housing, education, and self-employment (d) Physical health: self-reported reply to ““Would you say your health at this time is very good, good, fair, bad, or very bad?” and recent sickness (e) Mental health: stress and depression measured by Cohen’s Perceived Stress Scale (PSS) and Center for Epidemiologic Studies Depression Scale (CES-D) (f) Outlook and control: optimism, intra-household decision power, and self-perception of community status.

The sample frame was drawn from the universe of 3000 new applicants to the Lender. Of this about half were approved and the other rejected. The rejects were fed into a computer randomizer that encouraged loan officers to reconsider randomly selected rejects. Those who were egregiously uncreditworthy had no probability of being suggested to the loan officers, thus those that were reconsidered were the “marginal applicants” who were potentially creditworthy. The final decision of loan approval rested on the loan officer.

Only one survey was done within six to twelve months of the date that the applicant entered the experiment by applying for a loan and being placed in the marginal group. There was no baseline survey.

Computer randomizer.

Individuals.

No

237 individuals

237 individuals

Control: 128
Treatment: 109

EXPANDING CREDIT ACCESS: USING RANDOMIZED SUPPLY DECISIONS TO ESTIMATE THE IMPACTS

Expanding access to commercial credit is a key ingredient of development strategies worldwide. There is less consensus on the role of consumer credit, particularly when extended at high interest rates. Popular skepticism about “unproductive” and “usurious”
lending is fueled by academic work highlighting behavioral biases that induce overborrowing. We estimate the impacts of expanding access to consumer credit at 200% APR using a field experiment and follow-up survey and administrative data. The randomly assigned marginal loans produced significant net benefits for borrowers across a wide range of outcomes. There is also some evidence that the marginal loans were profitable.

Karlan, Dean, and Jonathan Zinman. 2010. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts." The Review of Financial Studies 23(1): 433-464.

https://www.povertyactionlab.org/sites/default/files/publications/62_39%20Expanding%20Credit%20Access%20South%20Africa.pdf

SMALL INDIVIDUAL LOANS AND MENTAL HEALTH: A RANDOMIZED CONTROLLED TRIAL AMONG SOUTH AFRICAN ADULTS

Background
In the developing world, access to small, individual loans has been variously hailed as a poverty alleviation tool – in the context of “microcredit” – but has also been criticized as “usury” and harmful to vulnerable borrowers. Prior studies have assessed effects of access to credit on traditional economic outcomes for poor borrowers, but effects on mental health have been largely ignored.

Methods
Applicants who had previously been rejected (n=257) for a loan (200% annual percentage rate – APR) from a lender in South Africa were randomly assigned to a “second-look” that encouraged loan officers to approve their applications. This randomized encouragement resulted in 53% of applicants receiving a loan they otherwise would not have received. All subjects were assessed 6-12 months later with questions about demographics, socio-economic status, and two indicators of mental health: the Center for Epidemiologic Studies – Depression Scale (CES-D) and Cohen’s Perceived Stress scale. Intent-to-treat analyses were calculated using multinomial probit regressions.

Results
Randomization into receiving a “second look” for access to credit increased perceived stress in the combined sample of women and men; the findings were stronger among men. Credit access was associated with reduced depressive symptoms in men, but not women.

Conclusions
Our findings suggest that a mechanism used to reduce the economic stress of extremely poor individuals can have mixed effects on their experiences of psychological stress and depressive symptomatology. Our data support the notion that mental health should be included as a measure of success (or failure) when examining potential tools for poverty alleviation. Further longitudinal research is needed in South Africa and other settings to understand how borrowing at high interest rates affects gender roles and daily life activities.

Fernald, Lia, Rita Hamad, Dean Karlan, Emily Ozer, and Jonathan Zinman. 2008. "Small Individual Loans and Mental Health: A Randomized Controlled Trial Among South African Adults." BMC Health 8(409): 1-40.

https://www.povertyactionlab.org/sites/default/files/publications/Small%20individual%20loans%20and%20mental%20health.pdf