The role of borrowing in crisis coping among ultra-poor households in rural Bangladesh

Abstract

In this study, we show how decisions to borrow from different formal and informal sources are associated with different types of disasters. We estimate the associations between loans from different sources using monthly panel data from Northern Bangladesh. Households borrow from different sources to cope with disasters. The cost of loans, however, may vary by the source of funds. MFI loans, while low in terms of interest cost, usually require a savings deposit, loan or application fee, with a longer trip or waiting time. Hence, households resort to loans from informal sources to deal with crises. We estimate the impulse responses of loans from different sources, which clearly show a hump-shape centring for the months of disasters. Pre-emptive loans are associated only with partially anticipated shocks. Aggregate shocks also limit how much households can borrow from their local peers. Our findings rationalise the roles played by both informal and formal micro-loans in crisis coping in Bangladesh, where the market for microfinance is ubiquitous. The development of the emergency credit market and the introduction of insurance services in rural areas will require the non-price costs of such financial products to be lowered.