Formal and Informal Credit Markets in Egypt

The paper uses the concept of credit limit to analyze the determinants of household access to and participation in informal and formal credit markets in Malawi. Households are found to be credit constrained, on average, both in the formal and informal sectors; they borrow, on average, less than half of any increase in their credit lines. Furthermore, they are not discouraged in their participation and borrowing decisions by further increases in the formal interest rate and/or the transaction costs associated with getting formal credit. This suggests that getting access to credit is much more important than its cost for these households. Hence, credit policies should focus on making access easier rather than providing credit with subsidized interest rates. The composition of household assets is found to be much more important as a determinant of household access to formal credit than the total value of household assets or landholding size. In particular, a higher share of land and livestock in the total value of household assets is negatively correlated with access to formal credit. However, land remains a significant determinant of access to informal credit. Therefore, poor households whose assets consist mostly of land and livestock but who want to diversify into nonfarm income generation activities may be constrained by lack of capital. As informal loans are usually too small to help poor households start a viable nonfarm business, these households may be forced to rely on farming as the sole source of income, despite its unreliability because of the frequency of drought in Malawi. Finally, formal and informal credit are found to be imperfect substitutes. In particular, formal credit, whenever available, reduces but does not completely eliminate informal borrowing. This suggests that the two forms of credit fulfill different functions in the household's intertemporal transfer of resources.

The role of agricultural sectors in the economic development of a country is undeniable, especially in developing and least-developed ones, ensuring food supply, increasing national income, export earnings and poverty reduction. Vietnam is known as an emerging market, depending directly on agriculture-related activities for their livelihood, in which the issue of rural credit access still remains a confounding problem. The paper focuses on identifying the determinants of credit access in rural areas of Vietnam using Haiphong city as a case study, including formal and informal credit. The paper uses data collected from a survey of 180 rural households in a district of Haiphong city. The probit and linear regression models are applied to investigate the factors that determine household credit accessibility, i.e., the household’s decision to borrow and borrowing amounts. Results of this analysis reveal the different significant determinants of formal and informal credit market access. Group membership and connection are found to have significantly strong impacts on formal credit accessibility while informal credit access is strongly influenced by agriculture income and dependency ratio. The implications of these findings for enhancing formal credit accessibility and decreasing the dependence on informal markets are discussed.

Credit markets play essential roles in financial institutions. In developing countries, especially in emerging market countries which are in the process of restructuring of industry, it is important to identify the reasons of credit constrains by an efficient way to facilitate economic transaction. On common phenomena in China rural credit markets is the informal credit market develop rapidly, it is very common for rural households to both through their networks. However it is inadequate in addressing rural credit needs. This research has 3 specific objectives: (1) Explore the relative importance of formal vs. informal rural credit markets in China (2) Identify factors determining households' choice of credit sector and the size of loan rural households borrowed from formal or informal credit markets. (3) Explore the degree to which households are constrained in credit access and identify the underlying factors. This paper also has some policy implications based on the empirical studies. The government can release the households constrain by making the formal credit more flexible and increasing the informal credit such as the microfinance for women.

Previous articleNext article No AccessInterest Rates and Imperfect Competition in the Informal Credit Market of Rural ChileCharles NisbetCharles Nisbet Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Economic Development and Cultural Change Volume 16, Number 1Oct., 1967 Article DOIhttps://doi.org/10.1086/450270 Views: 16Total views on this site Citations: 13Citations are reported from Crossref Copyright 1967 The University of ChicagoPDF download Crossref reports the following articles citing this article:Ignacio González Correa, Claudio Robles Fostering Agriculture under the Industrializing State: The Caja de Crédito Agrario and Agricultural Credit in Post-Depression Chile, 1926-53, Historia Agraria Revista de agricultura e historia rural (Feb 2022).https://doi.org/10.26882/histagrar.086e05gRakhe P. Balachandran, Sarat Chandra Dhal Relationship between money lenders and farmers, Agricultural Finance Review 78, no.33 (Jun 2018): 330–347.https://doi.org/10.1108/AFR-07-2016-0066Sai Tang, Sijia Guo Formal and informal credit markets and rural credit demand in China, (Jul 2017): 1–7.https://doi.org/10.1109/IEIS.2017.8078663Dev Narayan Sarkar, Kaushik Kundu The economic and social importance of unorganized retailers in rural India, Journal of Rural Studies 43 (Feb 2016): 159–172.https://doi.org/10.1016/j.jrurstud.2015.12.003Kobil Ruziev, Peter Midmore Informal credit institutions in transition countries: a study of urban money lenders in post-communist Uzbekistan, Post-Communist Economies 26, no.33 (Aug 2014): 415–435.https://doi.org/10.1080/14631377.2014.937107Santonu Basu Why institutional credit agencies are reluctant to lend to the rural poor: A theoretical analysis of the Indian rural credit market, World Development 25, no.22 (Feb 1997): 267–280.https://doi.org/10.1016/S0305-750X(96)00103-9David E. Hojman Introduction, (Jan 1990): 1–20.https://doi.org/10.1007/978-1-349-10794-0_1Clive Bell Chapter 16 Credit markets and interlinked transactions, (Jan 1988): 763–830.https://doi.org/10.1016/S1573-4471(88)01019-8Jean‐Philippe Platteau, Anita Abraham An inquiry into quasi‐credit contracts: The role of reciprocal credit and interlinked deals in small‐scale fishing communities, Journal of Development Studies 23, no.44 (Jul 1987): 461–490.https://doi.org/10.1080/00220388708422044Chi-Wen Jevons Lee Accounting infrastructure and economic development, Journal of Accounting and Public Policy 6, no.22 (Jan 1987): 75–85.https://doi.org/10.1016/0278-4254(87)90007-XRay Bromley Introduction - the urban informal sector: Why is it worth discussing?, World Development 6, no.9-109-10 (Sep 1978): 1033–1039.https://doi.org/10.1016/0305-750X(78)90061-XSubrata Ghatak Rural interest rates in the Indian economy, The Journal of Development Studies 11, no.33 (Nov 2007): 190–201.https://doi.org/10.1080/00220387508421537Jerry R. Ladman SOME EMPIRICAL EVIDENCE IN UNORGANIZED RURAL CREDIT MARKETS*, Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie 19, no.33 (Nov 2008): 61–66.https://doi.org/10.1111/j.1744-7976.1971.tb01164.x

The study examines characteristics of informal financial market in Ghana and identifies the determinants of maize farmers? participation in informal financial market. The analysis is based on data collected from a survey of 595 maize farmers in seven districts of Ashanti and Brong Ahafo Regions of Ghana during May-July 2010. Descriptive statistics, Analysis of Variance (ANOVA) and logit model were used to analyse the data. The study revealed that intermediaries operating within the informal financial market are relatives and friends, maize traders, farm input sellers and private money lenders. Maize traders are major players in the informal credit market followed by agricultural input sellers. Also the study revealed that informal lenders accept maize for loan repayment. Analysis of variance suggests that the mean loan period and amount were not statistically significant among informal lenders. However, there is significant difference among interest rate offered by informal lenders. From the logit result regional location, gender, engagement in other economic activities and the level of agricultural commercialization were observed to be factors that influence farmers? demand for informal credit. A policy that would empower traders to offer credit to farmers would not only increase access to credit but also trade, consequently farm income which may promote savings and access to credit. Also, access to informal credit can be improved through development of market centres.

PurposeHow do informal lending institutions affect entrepreneurship? This paper aims to investigates the role of formal and informal credit market institutions in the decision to become an entrepreneur over the life cycle.Design/methodology/approachThe author developed a dynamic Roy model in which a decision to become an entrepreneur depends on the access to formal and informal credit markets, nonpecuniary benefits of entrepreneurship, career-specific entry costs, prior work experience, education, unobserved abilities and other labor market opportunities (salaried employment and nonemployment). Using detailed Russian panel microdata (the Russia longitudinal monitoring survey) and estimating a structural model of labor market decisions and borrowing options, the author assesses the impact of the development of informal and formal credit institutions.FindingsThe expansion of traditional (formal) credit market institutions positively impacts all workers’ categories, reduces the share of entrepreneurs who borrow from informal sources and incentivizes low-type entrepreneurs to switch to salaried employment. The development of the informal credit market reduces the percentage of high-type entrepreneurs who borrow from formal sources. In the case of default, a higher value of the social network or higher costs of losing social ties demotivate low-type entrepreneurs to borrow from informal sources. The author highlights the practical implications of estimates by evaluating policies designed to promote entrepreneurship, such as subsidies and accessibility regulations in credit market institutions.Originality/valueThis study contributes to the literature in several ways. Unlike other studies that focus on individual characteristics in the selection for self-employment [Humphries (2017), Hincapíe (2020), Gendron-Carrier (2021), Dillon and Stanton (2017)], the paper models labor and borrowing decisions jointly. Previous studies discuss transitions between salaried employment and self-employment, taking into account entrepreneurial earnings, wealth, education and age, but do not consider the availability of financial institutions as a driving factor for the selection into self-employment. To the best of the author’s knowledge, this paper shows for the first time that the transition from salaried employment to self-employment is standard and consistent with changes in access to financial institutions. Another feature of this study is incorporating both types of credit markets – formal and informal. The survey by the European Central Bank on the Access to Finance of Enterprises (2018) shows 18% of small and medium enterprise in EU pointed funds from family or friends. Therefore, the exclusion from consideration of informal credit markets may distort the understanding of the role of the accessibility of credit markets.

This article explores how participation in microfinance programs affects informal credit conditions. Using data on the rural credit market of Andhra Pradesh, I provide evidence that group lending participants obtain lower interest rates from the informal credit market. This result can be explained by two main factors. On the one hand, due to joint liability, group lending clients have high incentives to monitor each other, which implies a reduction in the agency costs for moneylenders. On the other hand, as microfinance borrowers are required to invest the credit in income generating activities, they face a lower default risk. Taken together, these two mechanisms may explain why microcredit borrowers are perceived as less risky by informal lenders. Overall, the findings suggest that moneylenders benefit from the duality in the market, thus providing empirical support to recent theoretical research hypothesizing that there is a complementarity relationship between formal and informal credit suppliers.

Purpose – Internationally, microfinance run by non-governmental organizations (NGOs) is often considered an important approach to meeting the credit demand of rural households, particularly among the poor. However, the perceived competitions with formal financial institutions and concerns about financial risks in the rural economy have impeded the development of microfinance by NGOs in China. Despite these concerns about NGO microfinance, little empirical evidence has been brought to prove them. The purpose of this paper is to provide empirical evidence of the relationship between NGO microfinance and farmers’ demand for formal and informal credit in rural China. Design/methodology/approach – The study is based on a household longitudinal data set consisting of 749 households from 40 microfinance villages in rural China. This study draws evidence from China's largest NGO microfinance. Out of the five county branches where China Foundation for Poverty Alleviation has launched institutionalized microfinance since 2006, the authors selected two of them. A random sampling approach was applied in surveying villages and households. In an effort to create impact assessments, the authors surveyed the detailed information on household characteristics and credit access during the period 2006-2009. A panel data is thus structured for the analysis. Findings – The authors found that the demand for credit in rural China is immense and rising, as formal financial institutions have gradually moved away from less developed regions in rural areas. In its place, informal lending has become a primary source of credit for the poor. However, where NGO microfinance has become available, both formal and informal credit has slowed down. The development and expansion of NGO microfinance did stand up as a substitution for institutional lenders and informal financial networks. Research limitations/implications – The findings have profound policy implications. First, since the development of NGO microfinance fill the demand for credit in rural China and poses low financial risk, the intellectual bias against NGO microfinance is unwarranted. In particular, the regulations that hamper the development of NGO microfinance should be corrected. Second, informal networks do not appear to be costless. Where NGO microfinance can substitute for them, it can mitigate the financial stresses related to the informal credit market.

A major problem for credit markets is to discover the factors that are responsible for the non-repayment of loans. This study identifies the factors which are liable to loan default in urban informal credit markets. A questionnaire survey was conducted among four hundred low-income people in Dhaka city who took loans from informal credit markets. A logistic regression was used to find out the factors which cause loan default in these markets. The results show that loan default is strongly related to interest rate, size of loan, loan diversion, and collateral of loan. In addition, multiple sources of income, borrower’s monthly income, education and age play important roles in this regard. The identification of the factors affecting loan default is expected to help the loan providers of both informal and formal credit markets to reduce default loans and establish discipline in financial markets. Keywords: Determinants; Loan default; Low-income borrower; Informal credit market; Dhaka DOI : 10.7176/EJBM/11-26-10 Publication date :September 30 th 2019

Delayed formal credit, bribing and the informal credit market in agriculture: A theoretical analysis

Interaction Of Formal and Informal Credit Markets In Backward Agriculture: A Theoretical Analysis

Credit is very important in the lives of the poor people. The benefits of credit are manifold. Even after more than six and a half decade since independence, the extent and importance of informal credit have not diminished to a great degree in India. This paper aims at to understand the significance of personalized relations in the working of the informal credit market with the help of the All Indian Debt and Investment survey data. Our analysis shows that there is distinct compartmentalization of the Indian credit market with respect to the disbursement of loan from various credit agencies. Each of these categories of credit agencies has some definite target group to cater to. Apart from this clear division of loaning pattern, the importance of trust, personalized knowledge and mutual co-operation in the informal credit market has also been observed.

Formal and informal credit markets for agricultural development in developing countries — The example of Pakistan

The paper presents a theory of interest rate determination on informal credit in backward agriculture when there is a market for formal credit. The farmer has to bribe the official of the formal credit agency in order to get formal credit. The official and the moneylender play a non‐cooperative game in choosing the amount of formal credit and the informal interest rate, respectively. The informal‐sector interest rate and the effective formal‐sector interest rate (incorporating the bribe) are equal in equilibrium. A reduction in the formal interest rate and/or an increase in the price of the product may lead to an increase in the equilibrium bribing rate and the informal interest rate when the formal credit and the informal credit are complementary to each other.

Informal credit markets are prevalent in many developing countries. Moneylenders, traders, unincorporated associations, families, and relatives provide credit and other financial services. In most cases, informal credit markets operate openly as they are not legally banned. However, they are also not subject to government regulation and control. So, they operate according to the local customs and norms. Informal credit markets play a critical role in the social and economic life of people with limited access to financial services from formal financial institutions. In this chapter, we provide an extensive review of informal credit markets. What social and economic functions do they provide to society, why do informal credit markets prevail even when formal financial institutions are geographically accessible to people, and how do governments and international development agents respond to informal credit markets? The theoretical discussion in this part provides insights into why the policy options to squeeze informal credit markets practically moneylenders have failed so far and what lesson can be taken from the nature and function of informal credit markets.