Payday Lending and Microcredit: Two Faces of the Same Problem?

Abstract

Despite large differences in socio‐economic, geographical and political background, this study finds noteworthy similarities in the determinants of financial exclusion in Canada and Bangladesh. Household income, education, regional differences and respondent age are common significant determinants of payday loan borrowing in Canada and microcredit borrowing in Bangladesh. Financial knowledge has been identified as a significant determinant of payday loan borrowing in Canada. Our results suggest the need for paying more attention to the causes of financial exclusion and to improving financial literacy because the regulatory policies on interest rates in both countries do not seem to be effective. Copyright © 2017 John Wiley & Sons, Ltd.

Systematized literature review on financial inclusion and exclusion in developed countries

“…The case of Canada is characterized by studies that address the spatial void in urban financial geography and fringe financial entities (Bowles et al, 2011;Simpson and Buckland, 2016). After taking an innovative perspective to compare the determinants of FI/FE in Canada and Bangladesh, Islam and Simpson (2018) also recommend improving financial literacy and a more attentive look into the causes of FI/FE. Last, Bowles et al (2011) focus their study on the Aboriginal population.…”

“…However, there are different understandings of the ways in which AFS and "financial access" relate to each other. For example, despite the trend that seeks to define financially excluded people as those turning to AFS (see Islam and Simpson, 2018;Koku and Jagpal, 2015;Caplan, 2014), Birkenmaier and Fu (2018) assert that financial access and AFS use are not the inverse of one another, but two separate weakly and positively correlated concepts. The results of this work illustrate the complex relationship between these terms.…”

“…To identify these determinants, most of the work on this subject uses mathematical and statistical analysis, and presents a positivist perspective. Some examples are Deku et al (2016), who look into ethnic and income determinants of consumer credit in the UK; the work of Islam and Simpson (2018), who test which personal and social factors determine the use of fringe financial services in Canada and Bangladesh; and that of Kosse and Vermeulen (2014), who assess the costs, ease of use and availability of the services when selecting a channel for remittances of 501 migrants in the Netherlands. Concerned with the need to increase access to financial products and services, some authors include the perspective of social policies.…”

“…This hypothesis states that alternative financial service suppliers will establish themselves in those locations where mainstream services are not available (Figart, 2013). Thus, financial geography may be considered a secondary dimension even in the two Canadian articles whose focus is the market exclusion approach (Bowles et al, 2011;Islam and Simpson, 2018).…”

“…exclusion debate FE is defined as the inability to meet financial needs in the formal market.It becomes an obstacle to the development of people's regular lifeBurton (2017),Deku et al (2016),Islam and Simpson (2018),Loureiro and Gonzalez (2015),Burton (2018), Fernandez-Olit et al (2018), Birkenmaier and Fu (2018), Harper et al (2018), Henry et al (2017), West and Friedline (2016), Myers et al (2012), Williams and Oumlil (2015), Friedline and West (2016), Aguila et al (2016), Corrado and Corrado (2015), Koku and Jagpal (2015), Bourles and Cozarenco (2014), Kosse and Vermeulen (2014), Caplan (2014), Russell et al (2013), Horska et al (2013), McKillop et al (2011), Rouse and Jayawarna (2011), Bowles et al (2011), Devlin (2009), Hood et al (2009) Financial geography approach Related to the "market exclusion debate." The theory emerges from a geographic perspective and the individual characteristics of the consumer are not as relevant as the demographic or territorial characteristics.…”