A new paper sheds new light on the impact of public and private transfers on credit markets, focusing on conditional cash transfers and remittances in rural Nicaragua. The paper finds that the reduction in income risk provided by remittances changes borrowers’ expected marginal returns to a loan and/or their creditworthiness, as perceived by lenders more effectively than conditional cash transfers from Government. In short, what makes remittances so powerful is their resilience (a strong signal to bankers). If Governments can work to increase remittances, it would help substantially in lifting people out of poverty:
Our findings show that, on average, CCTs did not have a significant effect on the likelihood of requesting a loan, while remittances increased it. The successful enforcement of the use of CCTs on long-term investments like education and health, shown in the literature1, seems to have left unchanged expected marginal returns to the short-term loans these households have access to or their creditworthiness as perceived by lenders. Likewise, any unspent part of the CCT seems to have left unchanged expected marginal returns to a loan and the lender’s perception of the household’s creditworthiness.
Remittances, on the other hand, are the result of a household strategy to reduce income variability and overcome liquidity constraints. Its positive effect on the decision to request a loan suggests access to remittances improved their expected marginal returns to a loan and/or their creditworthiness as perceived by lenders, through the reduction in income risk. This positive effect seems to offset any other substitution effect caused by the rise in liquidity that may discourage the request of a loan.