Hi,
For those who may not have seen this, it provides an interesting dimension of institutional behaviour providing financial products/ services.
Have a look,
Anuj
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Financial (Dis-)Information Evidence from a Multi-Country Audit Study
Xavier Giné and Rafael Keenan Mazer
Abstract
An audit study was conducted in Ghana, Mexico and Peru to understand the quality of financial information and products offered to low-income customers. Trained auditors visited multiple financial institutions, seeking credit and savings products. Consistent with Gabaix and Laibson (2006), staff only provides information about the cost when asked, disclosing less than a third of the total cost voluntarily. In fact, the cost disclosed voluntarily is uncorrelated with the expensiveness of the product.
In addition, clients are rarely offered the cheapest product, most likely because staff is incentivized to offer more expensive and thus more profitable products to the institution. This suggests that clients are not provided enough information to be able to compare among products, and that disclosure and transparency policies may be ineffective because they undermine the commercial interest of financial institutions.
Some excerpts:
"Consistent with these predictions we find that the staff provided enough information to allow auditors to apply for the loan or to open the savings account, but that very little voluntary information about the costs of the product was provided. The transparency index with voluntary disclosure of information is 29 percent for transaction accounts and 18 percent for credit products.6 In addition, the correlation between the cost disclosed voluntarily and the total cost of the product is zero. The transparency index of printed materials given to auditors is 35 percent for transaction accounts and 20 percent for credit products, while the correlation between the cost advertised and the real cost is 0.27. In sum, auditors are provided with too little information to make meaningful comparisons across products. What is remarkable about this finding is that despite the diversity in the quality of financial disclosure regulation across the three countries studied, the staff of financial institutions behave rather similarly.
Related, while savings auditors were offered products that matched their preference for maturity, they were rarely offered the cheapest product. For example in Mexico, the only country with a mandated basic savings account, auditors were offered the basic account in only 2 of the 54 visits in which they expressed a preference for a transaction account.7 By contrast, when faced with credit auditors requesting large amounts relative to household income (assigned to the high indebtedness script), financial institutions significantly reduced the amount granted if the application was finally approved.
Thus, firms seem to follow their own self-interest, which may explain why recent policy initiatives around product transparency and basic savings accounts have been met with little success. The limited impact of policies to promote transparency and mandated products is not new, and in this sense the paper contributes to the recent literature that uses audit studies to assess financial advice for financial investment (Mullainathan et al, 2012) and life insurance (Anagol et al, 2012)."
Anuj K. Jain
Sr. Coady Fellow| Microfinance and Development| COADY International Institute
St. Francis Xavier University, Antigonish, Nova Scotia, B2G 2W5| Ph: 902-872-0521
A Coady Educational Experience.
Now accepting applications for 2017 programs.
Posted by: Anuj Jain <ajain@stfx.ca>
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