Public consumer credit

Credit markets are prone to information asymmetries, which could cause inefficiencies such as credit rationing and exclusion. In general, private institutions could have advantages to find solutions to overcome these information problems. In some cases, due to the nature of the information problem or of the legal and regulatory framework, a carefully designed and operated public institution could also improve the functioning of the credit market. An example is Fonacot (Instituto del Fondo Nacional para el Consumo de los Trabajadores), a public institution that provides payroll credits to formal workers in Mexico. Fonacot is the financial institution with the lowest interest rate and the second largest number of borrowers in the Mexican payroll credit market, a segment of consumer credit. Fonacot secures access to credit in fair conditions, specially to lower-income workers. It provides incentives to formal employment with credit access benefits that are costless to firms. It could establish reference prices in the consumer credit market. It could serve as a countercyclical economic policy, to provide consumption with direct impulse in situations of weak aggregate demand. It also serves to make the State’s social commitment more vocal. The functioning of the institution does not require periodic fiscal resources as its sustainability is created through the margins on the credits’ collection. The Fonacot experience can be replicated in other countries, allowing governments to introduce a social scope in their financial systems, in a sustainable way, in competition with the other institutions. More information is available in the following presentation.

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