Land Ownership, Access to and Cost of Informal Credit: Evidence from the Mekong Delta

Abstract

Access to credit and its cost is a major challenge for farmers in developing countries. Formal moneylenders often ration these economic agents, as they lack assets to give as collateral for the loans. Consequently, farmers resort to informal credit. Several studies show that land serves as collateral for accessing formal credit, but they often do not find any significant effect of land size on access to informal credit. Here I study the effects of land ownership on both the demand and the cost of informal credit in the Mekong Delta. The results show that as land ownership increases, both the demand and the cost of informal loans decrease. This result is relevant in developing countries, where land reforms are still ongoing, as it shows that land redistribution may contribute to the development of formal credit markets.