Credit Rationing and Race in Two Brazilian Cities

Abstract

This paper analyzes a survey of individual microentrepreneurs’ (MEI) access to credit for business, broken down by their color or race in two Brazilian cities: Rio de Janeiro and Salvador. The central hypothesis of this study was that color or race is a significant predictor for credit rationing in both cities. However, the most crucial variables to explain the difference in credit approval were primarily related to credit risk operation—adverse selection, moral hazard, and collateral—as expressed by predictor: loan size and credit restriction (inversely correlated to odds of credit approval). The city of the loan operation had a robust explanatory power, with credit more accessible in Rio de Janeiro than in Salvador. Evidence of racial discrimination in the credit markets for business affected not all Afro-Brazilian MEI but blacks compared with white and brown MEI. Lenders could treat potential borrowers based on a pigmentocratic pattern, with this issue appearing more clearly in Rio de Janeiro. Further inquiries in this realm are recommended, preferably with a larger sample and a survey covering all Brazilian domestic territory.