Income inequality and credit markets

Figueroa, Aldo

2011-12

LC/G.2508-P

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Three empirical regularities have been identified in the financialliterature: bank credit markets operate with collateral, they operate withexcess demand and they coexist with other forms of credit provision. Inthe particular case of less developed countries, the financial structurecomprises the banking industry, the formal non-banking industry andthe informal sector. This paper presents a theoretical model that explainsall three regularities together. According to the model, wealth inequalityin society is the essential factor that explains this dual-dual financialstructure. The model predicts market segmentation: the wealthy and thebanks constitute one market, the less wealthy and formal non-bankingorganizations constitute another and the poorest groups and small lendersconstitute the informal sector; moreover, credit is more expensive inthe latter sectors. As long as wealth inequality remains unchanged, thisfinancial structure will prevail. The public policy implications of the modelare also presented.

Includes bibliography

INFORMAL SECTOR; BANKS; FINANCIAL INSTITUTIONS; FINANCIAL SERVICES; MARKETS; BANK DEPOSITS; BANKERS' COMMERCIAL CREDITS; INCOME DISTRIBUTION; INCOME; SECTOR INFORMAL; INSTITUCIONES FINANCIERAS; BANCOS; SERVICIOS FINANCIEROS; MERCADOS; CREDITOS COMERCIALES BANCARIOS; DEPOSITOS BANCARIOS; DISTRIBUCION DEL INGRESO; INGRESOS;