Discrimination in hire‐purchase lending by retailers of consumer durables in apartheid South Africa

A double‐hurdle partial observability model of hire‐purchase lending is specified and estimated to test for racial discrimination by retailers of consumer durables during apartheid. ‘Discrimination’ is defined as supplying no loans or less desirable loans to certain borrowers, who do not differ from more successful borrowers with respect to creditworthiness but who do differ with respect to race. There is strong evidence of discrimination. In particular, black households are 13 percentage points more likely to desire a hire‐purchase loan but not to have one supplied to them than are other households equivalent in all ways except race. Although the statistical test cannot determine whether race affected lending because lenders were bigoted or because race is correlated with unobserved characteristics correlated in turn with creditworthiness, increased access to formal loans for all South Africans could be promoted by relaxing the Usury Act and by removing from loan applications information that could reveal an applicant's race.

Notes

Respectively Graduate Research Assistant, Department of Agricultural Economics, Ohio State University; Graduate Teaching Associate, Department of Economics, Ohio State University; Professor, Department of Agricultural Economics, Ohio State University: Principal Policy Analyst, Development Bank of Southern Africa: and Chair of the Department of Agricultural Economics, University of Stellenbosch. The authors are grateful to Simon Mpele and Dudley Homer of the South African Labour and Development Research Unit at the University of Cape Town for providing access to household survey data.