The Effects of Formal Financial Inclusion on Informal Credit Use: Evidence from Colombia

Héctor M. Posada, Carlos Felipe Gaviria-Garcés and David Londoño

Emerging Markets Finance and Trade, 2025, vol. 61, issue 9, 2590-2615

Abstract: It is well known that formal credit can improve household wellbeing in developing countries, however, its relationship to informal credit as a substitute or complement is uncertain. This study aims to estimate the causal effect of formal credit on the use of informal credit sources using a Fuzzy Regression Discontinuity Design which exploits credit allocation rules of formal institutions. We use financial and socioeconomic information directly provided by households to the Colombian Longitudinal Household Survey. With this information we obtain a credit score and estimate a threshold, which together replicates the credit allocation rules of formal institutions. Our results show that formal credit reduces informal credit use. These findings underscore the potential of reforming credit assessment processes to enhance access to formal credit and mitigate the socio-economic risks associated with informal financing.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:61:y:2025:i:9:p:2590-2615

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DOI: 10.1080/1540496X.2025.2456547

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