Informal Borrowing Research Articles

Credit Choices in Rural Egypt: A Comparative Study of Formal and Informal Borrowing

Access to finance is essential for fostering financial inclusion, improving household economic well-being, and stimulating economic growth. However, if not prudently managed, it can become a double-edged sword, increasing the risk of over-indebtedness, particularly among low-income households. This paper investigates the borrowing behavior of rural households in Egypt, exploring whether it is motivated by the optimization of intertemporal consumption or reflects deeper financial vulnerabilities. The study enhances our understanding of rural households’ financial behavior in Egypt and contributes to the literature by introducing perceived general self-efficacy as a key behavioral factor. The paper employs a quantitative methodology using a probit analysis of the Egypt Labor Market Panel Survey to explore the factors affecting the demand for formal loans, informal borrowing, and Rotating Saving and Credit Associations (RoSCAs). The results show that informal credit plays a dominant role in meeting rural households’ financial needs. A significant positive relationship between formal and informal credit suggests they are complementary. Elderly, married, less educated, and poorer individuals are more likely to seek both forms of credit, with employment stability being a key differentiator. Self-efficacy also has a significant positive effect. No significant regional differences are observed, except in the case of informal borrowing, with rural households in Upper Egypt showing less reliance, suggesting that social image may influence financial behavior in this region. The results suggest that demand for credit is driven by economic and financial vulnerability of rural households. The paper highlights key policy implications. First, to enhance participation in formal credit market, credit policies should offer more affordable, tailored credit relevant to starting a business rather than financing consumption, part of which is conspicuous. Second, the low self-efficacy among the rural poor suggests a need for policies that combine credit access with financial literacy and debt management support to prevent over-indebtedness.

Factors Influencing Household Debt Structure under Various Credit Constraints

Household debt is a critical component of family financial management, especially considering the prevalence of credit constraints. This study investigates the determinants of Chinese household debt structure, focusing on the choice between formal and informal borrowing and the proportion of formal debt under different credit constraints. Data from the 2018 China Family Panel Studies (CFPS) are analyzed using the bi-probit model. The results indicate that higher levels of household education and internet use significantly enhance the likelihood of accruing formal debt and weaken the tendency to engage in informal debt. This study innovatively employs the KZ index, traditionally used in corporate finance, to assess credit constraints at the household level. This new household credit constraint index demonstrates that the factors affecting the debt structure vary with the level of credit constraints, underscoring the complexity of household financial behaviors in China’s evolving credit landscape.

A qualitative investigation of financial decision-making and enabling factors among ethnic minority young adults in Hong Kong

Current understanding of financial decision-making among racial/ethnic minority young adults is limited: day-to-day financial decisions of racial/ethnic minorities are underexamined, younger racial/ethnic minorities receive limited attention, studies on racial/ethnic minorities are mainly conducted in Western societies, and research on financial literacy and decision-making is predominantly quantitative in nature. Against this backdrop, this study utilized a qualitative approach to examine a range of financial decision-making among ethnic minority young adults in Hong Kong, including personal budgeting, spending, financial planning, the use of financial products, debt management, and the detection of financial fraud. Individual interviews were conducted with 53 Pakistani, Indian, Nepalese, and Filipino participants aged 18 to 29 who employed various budgeting strategies and faced challenges. Their spending was modest, and they espoused various spending philosophies. Many saved approximately one-third of their income using saving tactics and setting financial goals, and investing in both Hong Kong and their home countries. Informal borrowing was common, though some sought alternative loans. One-third used credit cards, with accompanying occasional risks. Despite employing protective tactics, they still fell victim to scams. Factors facilitating their financial decision-making include family social capital, intrapersonal characteristics, social dynamics factors, command of knowledge, and facilitative contextual circumstances. This study addresses knowledge gaps by providing an in-depth understanding of financial decision-making among ethnic minority young adults in a non-Western context. It has significant implications for timely and tailored financial literacy education for minority societal members.

Comparative Analysis of Financial Inclusion in Nigeria, Sub-Saharan Africa, and the World

Abstract Using six widely accepted indicators, this study compares the progress made in financial inclusion in Nigeria, Sub-Saharan Africa, and the rest of the World, with a view to deducing lessons that each entity can improve upon. We find that Nigeria outperformed Sub-Saharan Africa in three indicators of financial inclusion while Sub-Saharan Africa did better than Nigeria in one metric. Nigeria and Sub-Saharan Africa exceeded the world average in informal borrowings. We also constructed an index of financial inclusion and found that financial institution account ownership, formal borrowing, informal borrowing, and debit or credit card ownership are significant positive determinants of the financial inclusion index. These findings indicate that policymakers in Nigeria and Sub-Saharan Africa have significant room for improving their financial inclusion standings towards the global average. We make recommendations on the aspects where policymakers can place their focus in pursuit of this goal.

Microfinance and Poverty Reduction in Assam: Uncovering the Nexus between Access to Credit and Household Well-being

This study investigates the impact of microcredit access on income and multidimensional poverty in rural Assam, India. Employing a quasi-experimental design and collecting primary data, the study utilises the probit model for empirical analysis. The findings indicate that equivalence factors influence individual welfare levels. Moreover, households receiving microcredit from semiformal and informal sources exhibit a higher incidence of poverty. Informal borrowers experience a more significant poverty gap compared to semiformal borrowers. However, the study does not find statistically significant evidence to confirm a poverty impact from pooled and formal credit sources. The prevalence of income and multidimensional poverty among semiformal and informal borrowers suggests that these individuals rely on borrowing to finance their children’s education and medical expenses. This points to a failure of the government’s universal education and health policies to uplift vulnerable segments of society. The study recommends providing credit facilities exclusively for productive economic activities to rural residents, accompanied by adequate market linkages.

Changes in Social Network Structure in Response to Exposure to Formal Credit Markets

Abstract We show that the entry of formal financial institutions can have far-reaching and long-lasting impacts on informal lending and social networks more generally. We first study the introduction of microfinance in 75 villages in Karnataka, India, 43 of which were exposed to microfinance. Using difference-in-differences, we show that networks shrank more in exposed villages. Moreover, links between households that were both unlikely to borrow from microfinance were at least as likely to disappear as links involving likely borrowers. We replicate these surprising findings in the context of a randomised controlled trial (RCT) in Hyderabad, where a microfinance institution randomly selected 52 of 104 neighbourhoods to enter first. Four years after all neighbourhoods were treated, households in early-entry neighbourhoods had credit access longer and had larger loans. We again find fewer social relationships between households in these neighbourhoods, even among those ex-ante unlikely to borrow. Because the results suggest global spillovers, atypical in usual models of network formation, we develop a new dynamic model of network formation that emphasizes chance meetings, where efforts to socialize generate a global network-level externality. Finally, we analyse informal borrowing and the sensitivity of consumption to income fluctuations. Households unlikely to take up microcredit suffer the greatest loss of informal borrowing and risk sharing, underscoring the global nature of the externality.

Illnesses and hardship financing in India: an evaluation of inpatient and outpatient cases, 2014-18

BackgroundProgress towards universal health coverage requires strengthening the country's health system. In developing countries, the increasing disease burden puts a lot of stress on scarce household finances. However, this burden is not the same for everyone. The economic burden varies across the disease groups and care levels. Government intervention is vital in formulating policies in addressing financial distress at the household level. In India, even when outpatient care forms a significant proportion of out-of-pocket expenditure, government schemes focus on reducing household expenditure on inpatient care alone. Thus, people resort to hardship financing practices like informal borrowing or selling of assets in the event of health shocks. In this context, the present study aims to identify the disease(s) that correlates with maximum hardship financing for outpatients and inpatients and to understand the change in hardship financing over time.MethodsWe used two waves of National Sample Survey Organisation’s data on social consumption on health- the 71st and the 75th rounds. Descriptive statistics are reported, and logistic regression is carried out to explain the adjusted impact of illness on hardship financing. Pooled logistic regression of the two rounds is estimated for inpatients and outpatients. Marginal effects are reported to study the changes in hardship financing over time.ResultsThe results suggest that cancer had the maximum likelihood of causing hardship financing in India for both inpatients (Odds ratio 2.41; 95% Confidence Interval (CI): 2.03 - 2.86 (71st round), 2.54; 95% CI: 2.21 - 2.93 (75th round)) and outpatients (Odds ratio 6.11; 95% CI: 2.95 - 12.64 (71st round), 3.07; 95% CI: 2.14 - 4.40 (75th round)). In 2018, for outpatients, the hardship financing for health care needs was higher at public health facilities, compared to private health facilities (Odds ratio 0.72; 95% CI: 0.62 - 0.83 (75th round). The marginal effects model of pooled cross-section analysis reveals that from 2014 to 2018, the hardship financing had decreased for inpatients (Odds ratio 0.747; 95% CI:0.80 - -0.70), whereas it had increased for outpatients (Odds ratio 0.0126; 95% CI: 0.01 - 0.02). Our results also show that the likelihood of resorting to hardship financing for illness among women was lesser than that of men.ConclusionGovernment intervention is quintessential to decrease the hardship financing caused by cancer. The intra-household inequalities play an important role in explaining their hardship financing strategies. We suggest the need for more financial risk protection for outpatient care to address hardship financing.

Social networks with organisational resource, generalised trust and informal loans: Evidence from rural Vietnam

The banking system in developing countries is much less developed than in other parts of the world; hence it is more common for households to borrow money through informal channels. Informal loans are characterised by social collateral rather than physical collateral. The literature shows that social networks and social trust are important components of social collateral. While many studies show empirical evidence of an association between social networks and informal borrowing, there is a lack of empirical evidence of the way in which social networks and social trust play as social collaterals. This paper uses a longitudinal dataset to examine the role of generalised trust and social networks, under organisational networking resources, in informal loans among rural households in twelve provinces across Vietnam. Empirical results show that community social networks impose a positive effect on obtaining informal loans and on repayment performance, while generalised trust is associated with the probability of falling into arrears.

Promoting financial inclusion for savings groups: A financial education programme in rural Rwanda

This study evaluates CARE Canada’s financial education programme for members of savings groups in rural Rwanda two years after the intervention. The programme was designed to help group members gain better financial understanding and to encourage the usage of formal financial services. My difference-in-differences estimation only allows me to rule out an effect larger than 0.33 points of a financial literacy score measuring participants’ ability to calculate financial trade-offs. This is large considering an average score of 1.7 at baseline. Among the final impacts, I find no evidence that the intervention impacts formal savings, assets, or subjective resilience, with the possible exception of a change from informal borrowing to formal borrowing. Overall, my findings suggest a mixed picture for usage of formal financial services.

Mobile money and healthcare use: Evidence from East Africa

This paper uses a difference-in-difference framework to estimate the effects of mobile money transfer technology (MMT) on healthcare use in the face of negative health shocks. We use survey data from 2013 to 16 with quarterly observations on about 1800 households of 10 villages in the Kisumu region of Western Kenya. We find evidence that MMT, likely through greater ease of informal borrowing, helps households increase utilization of formal healthcare services in terms of visits to a clinic, consultation and medication expenditures in comparison with non-users of this technology. MMT appears to be complementary with other risk-sharing mechanisms such as farm sales and in-kind transfers.

Changes in Social Network Structure in Response to Exposure to Formal Credit Markets

Formal financial institutions can have far-reaching and long-lasting impacts on informal lending and information networks. We first study 75 villages in Karnataka, 43 of which were exposed to microfinance after we first collected detailed network data. Networks shrink more in exposed villages. Links between households that were unlikely to ever borrow from microfinance are at least as likely to disappear as links involving likely borrowers. We replicate these surprising findings in the context of a randomized controlled trial in Hyderabad, where a microfinance institution randomly selected neighborhoods to enter first. Four years after all neighborhoods were treated, households in early-entry neighborhoods had credit access longer and had larger loans. We again find fewer social relationships between households in early-entry neighborhoods, even among those ex-ante unlikely to borrow. Because the results suggest global spillovers, which are inconsistent with standard models of network formation, we develop a new dynamic model of network formation that emphasizes chance meetings, where efforts to socialize generate a global network-level externality. Finally, we analyze informal borrowing and the sensitivity of consumption to income fluctuations. Households unlikely to take up microcredit suffer the greatest loss of informal borrowing and risk sharing, underscoring the global nature of the externality.

The Impacts of Microcredit on Informal Risk Sharing: Experimental Evidence from China

This study examines the impacts of a large-scale government-led microcredit program on informal risk sharing among poor households in rural China based on a randomized controlled trial. The results show that financial inclusion, on average, reduced households’ borrowing from informal financial networks, and informal borrowing decreased substantially among households that were program members, regardless of whether they had borrowed from the program. Further analyses suggest that the program alleviated the dependence on informal financial networks to afford consumption shocks for program members who did not obtain program loans, and the crowding-out effect on informal borrowing existed even during the announcement period of the program for these households. These results are consistent with limited commitment models, which predict that access to microcredit raises the expected value of autarky utility relative to the utility derived from risk-pooling arrangements, and thus reduces the scope of implementable risk-sharing contracts.

Homevalue misestimation and household leverage: An empirical study of Chinese urban households

Households often make errors in assessing homevalue. By merging representative Chinese urban household survey data with web-scraped housing price data, we estimate a hedonic model to assess the real value of homes and calculate the extent of homevalue misestimation. We show that homevalue misestimation is significantly related to household leverage: a 10% increase in the extent of homevalue misestimation is associated with a 1.88 percentage increase in household leverage, in terms of debt-to-income ratios. Moreover, both formal and informal borrowing are increasing with respect to homevalue misestimation. A variety of robustness checks and heterogeneity analyses further support our main results. The correlation between misestimation and leverage is even larger for households who underestimate their homevalue. It's demonstrated that the lack of housing market information and endowment effect both contribute to misestimation. However, there is no evidence that overconfidence, risk attitude, or anchoring effect significantly affect misestimation. These findings have policy implications for the recent debate on property taxes, indicating the unexpected consequences of property taxes by providing more precise information on homevalue.

Social Capital, Financial Literacy and Lending Behaviour of Farmers with Different Incomes--Evidence Based on CHFS 2015 Data

Using microdata from the China Household Financial Survey Project (CHFS 2015), a negative binomial model is used to study the impact of social capital and financial literacy on the lending behavior of farmers with different incomes. The study found that the positive impact of social capital on the formal borrowing behavior of low- and middle-income farmers was significant, while the impact on informal borrowing behavior and both types of borrowing behavior of high-income farmers were not significant. Financial literacy has a significant positive effect on formal lending behavior only for high-income farmers. Financial literacy has a significant positive effect on formal lending behavior only for high-income farmers.

Choice between formal and informal financing in cottage industry firm: The application of robust regression

This article aims to analyze the effect of formal and informal financing on the growth of cottage industry firms in village Islampur in Swat one of the districts of Khyber Pakhtunkhwa Pakistan. Primary data were collected through Focused Group Discussions (FGD) and a total of 208 cottage industry firms were surveyed. Robust Regression techniques were employed to analyze the data. The results show that informal financing has a higher impact than formal financing on the growth of the small firms in the study area. There is a tendency for informal borrowing among the small size firms' owners due to the fact that access to formal sources is hindered by a multitude of factors including high interest rate, complex application procedure, and demand for a collateral among others. On the contrary, we find that in case of large size firms, formal financing has a significant influence on firms' growth for cottage industry. Moreover, in co‐financing where the ratio of informal is greater than formal financing has a significant positive effect on the firm's growth. The findings of the study have implications for devising loan policies of the financial institutions to take into account these factors. The financial institutions need to come up with packages that meets the need of the small and medium enterprises.

Informal Borrowers and Financial Exclusion: The Invisible Unbanked at the Intersections of Race and Gender

Previous work has found that predominantly Black and Hispanic neighborhoods continue to have less access to mainstream financial services and a greater prevalence of high-cost alternatives. Less attention has been dedicated to the other financial tools available to financially excluded households. Borrowing from friends and family is one widely used yet under-examined strategy for coping with emergency expenses. The literature provides preliminary evidence that informal borrowing and the costs of such borrowing are unequally distributed by race and gender. Drawing on data from the Survey of Household Economics and Decisionmaking, this article identifies predictors of planned informal borrowing use and examines whether this borrowing is symptomatic of financial exclusion using a bivariate probit model. Women of color are disproportionately likely to plan on using informal borrowing as their sole strategy for coping with an emergency expense. Black women in particular are twice as likely to do so as White respondents. While this informality occurs among the banked and unbanked, unobserved factors such as limited access to bank branches link financial exclusion and informal borrowing.

Do households care about cash? Exploring the heterogeneous effects of India's demonetization

The recent demonetization exercise in India is a unique monetary experiment that made 86 percent of the total currency in circulation invalid. In a country where the currency in circulation constitutes 12 percent of GDP, the policy turned out to be a purely exogenous macroeconomic shock that affected all agents of the economy. This paper documents the impact of this macroeconomic shock on households. By construction, the policy helped households with bank accounts in disposing of the demonetized cash. We use a new household-level data set to tease out the effects of this policy on households with no bank accounts relative to households with bank accounts. Our results show that the impact of demonetization on household income and expenditure has been transient. We find that households with no bank accounts experienced a significant decrease in expenditure in November and December-2016. We find a slight decline in income in November-2016 but the effect dissipates thereafter. There is significant heterogeneity in the impact across households in different asset quartiles. We also show evidence of recovery of household finances whereby households were able to smooth out consumption during the post-demonetization period. However, this recovery phase is associated with an increase in household borrowing from different sources. In particular, informal borrowing (e.g. money lenders and shops) increased during this period.

Credit Constraints on Farm Household Welfare in Rural China: Evidence from Fujian Province

This study investigates the effect of demographic factors on formal and informal borrowing households in rural Fujian Province. The study tests whether credit constraint affects rural farmers’ welfare in the studied region, using a probit regression and endogenous switching regression model to analyse data collected in 2017 from 960 farm households. Analysis shows that age, poverty, household size, and farmland size operate to constrain credit in formal borrowing. Results also indicate that level of education, farm land size and age have significant impacts on rural household borrowing from informal sources. The results from the endogenous switching model approach suggest that credit constraint does have a significant impact on rural farmers’ consumption and welfare in Fujian province.

Credit Demand among Small Farmers: A District Level Approach, Pakistan

In the current study, determinants of credit demand among small farmers in the Mandi Bahauddin district of Pakistan were investigated. For this purpose, interviews with 123 small farmers in six villages of this district were conducted. Both qualitative and quantitative techniques were used to examine factors that affect credit demands. Seven determinants were devised and tested, and a probit model was employed to analyze the effects of education, household size, and income on the credit demand. Through qualitative methods, factors like informal lending, interest rate, consumption smoothing, and transaction cost were analyzed. It was noted that informal borrowing, higher interest rates, and high transaction costs crowded out formal lending. A positive correlation was observed between education and credit demand. Household size and all types of incomes did not significantly correlate with credit demand.

Rural Credit Constraint and Informal Rural Credit Accessibility in China

This paper investigates the effects of rural households’ demographic characteristics on formal credit constraint, and explores the relationship between informal and formal lending in rural China. Using 2013 China’s Household Finance survey data, the authors apply probit regression models to investigate the effects of demographic factors on formal credit constraint and the household’s decision to borrow from informal credit sources. In addition, the endogenous switching regression model is applied to evaluate the impact of credit constraint on the welfare of rural farm households. The empirical evidence confirms that age, family size, annual household nonagricultural income, level of education, and history of informal borrowing have significant influence over credit constraint. Moreover, annual household nonagricultural income, the presence of children, borrowing from social networks and monthly communication expenses significantly impact rural households’ decision to utilise informal borrowing. Results from the endogenous switching regression model suggest that credit constraint by formal credit sources has no impact on household consumption.