Informal Lenders Research Articles

Microfinance and Moneylenders: Long-run Effects of MFIs on Informal Credit Market in Bangladesh

Abstract This paper provides evidence on the effects of microfinance competition on moneylender interest rates and households' dependence on informal credit. The views among practitioners diverge sharply: proponents claim that the MFI competition reduces both the moneylender interest rate and households' reliance on informal credit, while critics argue the opposite. Taking advantage of recent econometric approaches to address selection on unobservables without imposing standard exclusion restrictions, we find that the MFI competition does not reduce moneylender interest rates, partially repudiating the proponents. There is no perceptible effect at low levels of the MFI coverage, but when the MFI coverage is high enough, the moneylender interest rate increases significantly. In contrast, a household's dependence on informal credit goes down after becoming an MFI member, which contradicts part of the critic's argument. The evidence is consistent with models where either the MFIs or the moneylenders engage in cream skimming, and fixed costs are important in informal lending.

Financial inclusion to build economic resilience in small-scale fisheries

Lack of access to financial services leaves fishing households and their fishing businesses with limited options to obtain financing and manage cash flow for family expenses or business investments. The lack of access is filled by informal lenders that can also be the primary buyers of fish or the owners of the boats. For rural fishing households, access to formal financial services, also known as financial inclusion, can bring increased financial resilience to the household. The paper reviews the current barriers to financial inclusion of small-scale fishing households such as limited financial capability and literacy, lack of assets for collateral, geographic distance from a financial institution and lack of formal identification. It also discusses solutions to address these barriers including financial literacy, de-risking financial institutions, financial data collection, provision of a range of financial services besides credit, and understanding the client that will enable fishing households to retain control over their earnings and savings. Financial inclusion can help reduce the different vulnerabilities of poor fishing households and rural communities and lead to improved economic resilience.

Contractual Restrictions and Debt Traps

Microcredit and other forms of small-scale finance have failed to catalyze entrepreneurship in developing countries. In these credit markets, borrowers and lenders often bargain over not only the interest rate but also implicit restrictions on types of investment. We build a dynamic model of informal lending and show this may lead to endogenous debt traps. Lenders constrain business growth for poor borrowers yet richer borrowers may grow their businesses faster than they could have without credit. The theory offers nuanced comparative statics and rationalizes the low average impact and low demand of microfinance despite its high impact on larger businesses.

Human Capital, Social Capital, and Farmers’ Credit Availability in China: Based on the Analysis of the Ordered Probit and PSM Models

Rural credit is very important to the increase of farmers’ income and the development of rural economy, and it has attracted wide attention from scholars. Many scholars have paid attention to the impact of social capital on farmers’ credit availability, but the research conclusions have not yet been unified. In addition, human capital is also one of the important factors that scholars pay attention to. However, the research mainly focuses on farmer education and pays less attention to their health. Based on the China Household Income Project (CHIP2013) database, we evaluated the impact of human capital (education and health of farmers) and social capital on the credit availability of farmers. To ensure the robustness of our results, we used both the ordered probit model and the propensity score matching (PSM) model to carry out the estimations. Therefore, the study not only improves the research framework of the impact of human capital on farmers’ credit availability, but also uses a more accurate method to estimate the net impact of social capital on farmers’ credit availability. The results showed that, firstly, in terms of human capital, farmers’ educational and health levels have a significant positive impact on their formal credit availability, but no significant impact on their informal credit availability. In particular, farmers with a high school education or above are more likely to obtain a formal loan. Secondly, in terms of social capital, interpersonal relationship capital and political relationship capital are beneficial for farmers obtaining loans from formal and informal channels. Organizational relationship capital only has a more significant positive impact on the informal credit availability of farmers. These results imply that formal financial institutions not only pay attention to farmers’ human capital but also their social capital to reduce the risk of lending. However, informal lenders, that is, relatives or friends, pay more attention to the social capital of farmers.

Financial inclusion, land title and credit: evidence from China

PurposeThe purpose of this paper is to study land title’s credit effect from a financial inclusion perspective in China. The focus is both small land holding and poor farmers. Formal and informal finances are considered to test their differences in land title’s credit effect.Design/methodology/approachThe authors use augmented inverse-probability weights of the doubly robust method to test the effect of land titling on the rural credit market by addressing self-selection, endogeneity and heterogeneity concerns.FindingsResults show that the poor, non-poor and small land holders with land titles are willing to borrow more from formal financial institutions. Land titling increases loan accessibility for non-poor and small land holding farmers. As for informal financing, large land holding and non-poor farmers show a decrease in informal lending. Land titling has a financial inclusion effect for some farmers, but poor farmers’ credit restrictions are not entirely solved by land titling.Originality/valueThis is the first study that focuses on the financial inclusion effect of farm land titling in China.

Farmer innovations in financing smallholder maize production in Northern Ghana

PurposeThe purpose of this paper is to explore smallholder agricultural financing in Ghana’s Northern region by identifying farmers’ preferred traditional and innovative financing methods and estimating the determinants of use of innovative financing methods.Design/methodology/approachThis paper presented a list of documented traditional financing methods to farmers during in-depth interviews and employed descriptive statistics to summarize choice and amounts sourced from traditional methods. Two questions from the survey revealed a felt need for extra financing sources for credit-rationed farmers. Farmers with positive responses to either or both questions were classified as “users of innovative financing”. The authors then used a probit model to examine factors that influence decisions to use innovative financing method.FindingsFarmers’ own savings, reinvesting past season’s profits and financing maize production with income from other commercial crops were the most popular traditional methods. The authors found complementary relations between formal and informal lending systems in the rural financial market. Smallholders also took farm and non-farm “by-day” jobs to raise income for farm investment and/or joined Village Savings and Loans Associations (VSLAs) specifically to take advantage of possible credit opportunities. These two latter methods were operationalized in this study as innovative agricultural financing. The results show that access to credit, social capital and market participation increased the likelihood of using innovative financing methods. Alternatively, farmer group membership, diversity in crop production and being a household head diminished the likelihood of innovative financing use.Practical implicationsThe activities of VSLAs can be regulated and expanded to spread its benefits to more farmers. Also, creating avenues for dry season labour market participation in the region could enable farmers raise capital for farm investment.Originality/valueThis study explores existing practices and farmer innovations to agricultural financing and, by so doing, deviates from the vast literature focussing mainly on microcredit provisioning as the main model of smallholder agricultural financing in Africa.

Social Trust Formation and Credit Accessibility—Evidence from Rural Households in China

Trust as a form of social capital plays an important role in improving the cooperation between agents, especially in credit lending activities. Trust building has attracted significant research interest, and gift giving has been shown to be one of its main drivers. Nonetheless, the mechanism of gift giving in the formation of trust networks and the channels through which gift giving and trust affect cooperation require further investigation. In this paper, we first separate social trust into community trust and personal trust, and we examine how gift giving affects the formation of each level of trust. We then explore how trust and gift giving affect rural households’ access to formal and informal sources of credit. Our results show that gift giving mainly helps in forming trust at the personal level rather than the community level. In turn, personal and community trust can facilitate access to informal and formal sources of credit, respectively. In addition, personal trust facilitates access to informal loans for consumption and medical expenses but not production. Overall, our findings show that gift giving is mainly used to build personal trust which facilitates access to informal lending for risk-sharing purposes.

The Reality of Financing Small Tourism Firms

Small tourist firms occupy an important place within the Indian tourism industry and make a significant contribution towards gross domestic production. This study investigates access to and finance preferences of SME tourism firms in the Punjab area, India. The study employed a post-positivist research approach depending on semi-structured questionnaires and interviews. The findings confirmed that tourism firms relied on pecking order trajectory, drawing capital from own savings, family and informal lenders, which is consistent with the literature. The study provides a unique insight into issues related to tourism firms and benchmarks findings with SME literature to identify the salient points.

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.

\u2018Alt\u0131n G\xfcn\xfc\u2019: migrant women\u2019s social protection networks

Although there is an increasing interest in the role of personal networks in migrants’ social protection, they are usually either treated as ‘given’ or the ‘second-best’ option for protection against social risks such as poverty. Altın Günü (The Day of Gold) is a specific form of Turkish women’s networks functioning as a type of rotating savings and credit association promoting both savings and make financial capital available to its members with trustworthy relationships. It is exclusive to women with rather selective membership based on ethnicity, class, marital and migrant status. Although it is common practice in Turkey, it is widely neglected as a specific form of social protection once it is practiced after migration. Migrant women were already familiar with the concept and practice of Altın Günü and they have adapted to Germany shaped by their needs, obligations, and location. Drawing on qualitative interviews and participant observation among Turkish immigrant women in Germany, this article offers an in-depth analysis of such personal protective networks. In so doing, this article not only addresses the ways in which informal lending circles of migrant women are formed and utilized, but also highlights the processes of hierarchization of membership and redistribution of valuable resources within and across borders.

Credit Rationing in P2P Lending to SMEs: Do Lender-Borrower Relationships Matter?

This paper studies the role of individual P2P investors that are acquainted with the borrower in mitigating credit rationing in P2P lending to SMEs. I use proprietary data provided by one of the biggest Dutch P2P lending platforms, on which personal acquaintances of the borrower are able to invest before other P2P investors do. I find that P2P investors invest more in loans of borrowers to whom they are personally acquainted. More initial investment by investors acquainted with the borrower is subsequently associated with a higher likelihood of obtaining a second loan from the P2P lender, larger investments by other P2P investors and lower ex post defaults. These results are consistent with informal lenders having superior information or monitoring skills and rational herding following informal investors' investment decisions.

Disentangling the Effect of Trust on Bank Lending

Please do not quote without the permission of the authors. Abstract This paper examines the effect of trust on bank lending using a sample of commercial banks in 34 countries around the world. We distinguish between two forms of trust: In-group trust, which we define as the trust in people we know, and Out-group trust, which we define as the trust in people we meet for the first time. We find that that Out-group trust significantly boosts bank lending. A closer look shows that this effect only holds in countries with relatively lower levels of institutional and judicial development. As for In-group trust, we find that it affects bank lending indirectly by favoring the development of informal lending. Overall, this paper provides novel evidence on the importance of trust and the mechanisms by which it influences bank lending around the world. JEL classification: G21, G28, G32

Social Interaction and Family Entrepreneurship

Since the call of Premier Li Keqiang for the mass entrepreneurship and innovation”, the society has set off a wave of entrepreneurship for all. Among them, college students, international students and returning migrant workers are particularly prominent. Inspiring the double innovation” vitality has also become one of the important governance goals of the government at all levels, and the effective path to seek to stimulate entrepreneurial vitality has become a hot topic of concern for policy makers and theorists. By using the latest 2016 micro-data from the China Family Tracking Survey（CFPS）, and the discrete selection model and the OLS model, the article analyzes the impact of social interaction on family entrepreneurial decision-making, and explores its mechanism. The results show that the three agent variables of social interaction: human welfare payments, communication expenditures and non-family members’ meal expenses have a positive impact on family entrepreneurial decision-making at a level of 1%. Specifically, in the case where other variables are fixed, each increase in one unit of human welfare payments, communication expenditures and non-family members’ meal expenses will increase the chances of family entrepreneurship by 1.7%, 3.7% and 3.5%. As far as the impact mechanism is concerned, （1）Social interaction information acquisition and social learning mechanism indicate that in areas with high entrepreneurial participation rates in districts and counties, whether it is human welfare payments, communication expenditures or non-family members’ meal expenses, entrepreneurial decision-making has had a positive impact; in areas with low entrepreneurial participation rates in districts and counties, in addition to personal spending, communication expenditures and non-family members’ meal expenses will also have a positive impact on entrepreneurial decision-making. However, from their coefficient, the social interaction coefficient of the districts with high entrepreneurial participation rates is far greater than the social interaction coefficient of the districts with low entrepreneurial participation rates, which indicates that the social interaction effect of districts and counties with high entrepreneurial participation rates is greater than that of districts and counties with low entrepreneurial participation rates, that is, the social interaction effect of districts with high participation rates in districts and counties is more obvious.（2）The relative wealth concern mechanism shows that in the regions with low income Gini coefficient, the three agency variables of social interaction have a positive impact on family entrepreneurial decision-making; in the regions with high income Gini coefficient, except for the impact of human welfare payments on family entrepreneurial decision-making, the coefficient of the other two agent variables are not significant. This shows that in areas with small income gaps, the effect of social interaction on the participation of family entrepreneurs is more obvious.（3）The financing constraint mechanism shows that social interaction helps to alleviate the financing constraints of family entrepreneurship through informal lending channels, thus effectively increasing the probability of family entrepreneurship. The expansive discussion shows that social interaction and network information are also channels for family entrepreneurs to obtain relevant information, and there is a mutual substitution relationship between them. We use the cross-coefficient coefficient of the two to measure this substitution relationship. The results show that the coefficient of social interaction and network information cross-term is negative. Although it is not statistically significant, the economic significance indicates the existence of this alternative relationship. The policy implication of this paper is that it provides a new policy perspective for stimulating the double innovation” vitality. Relevant departments should fully consider the role of social interaction when formulating policies involving individual family entrepreneurship.

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.

Microfinancing and informal lending in Bogota, Colombia: a study on informal microbusinesses

Microfinancing and informal lending in Bogota, Colombia: a study on informal microbusinesses

Value Creation Through Employer Loans: Evidence of Informal Lending to Employees at Small, Labor-Intensive Firms

At small and medium-sized enterprises (SMEs), cash-strapped employees frequently request loans from employers because they cannot obtain money on reasonable terms elsewhere for exigent needs. In turn, employers decide whether to lend the money through formal (i.e., written, contractual) loans or more informal “off-the-book” (OTB) loans. Our exploration of this understudied source of credit unearths important questions about the reasons employers lend money to employees, the manner in which they decide to make formal or informal loans, and the coveted benefits employers derive from lending to their workers. Considering the pervasiveness and significance of loan choices among small firms, and the absence of studies on the topic, we tackle these questions through an analysis of 459 informal and formal loans issued by 83 small business owners to their employees. The results show that the issuance of OTB loans is a key tactic for employers to manage resource dependencies with valued workers.

Social networks and informal financial inclusion in China

Using the 2011 China Household Finance Survey (CHFS) database, we explore the heterogeneous impacts of social networks on informal financial inclusion for Chinese urban and rural households. We find that social networks significantly increase the probability of households’ participation in the informal financial market, augment the size of informal financial transaction, and raise the ratio of informal lending over the total household assets. We also identify the mechanisms through which the social networks affect households’ participation in the informal financial market. By reducing information cost, perceived risk and precautionary saving, social networks play a larger role for urban households than rural households. Notably, the effects of social networks on informal finance are strengthened with the development of formal financial market.

The Coexistence and Interaction of Formal and Informal Lending in China— Discussion of the Wenzhou Case

Interest in China’s economy has typically been focused on its phenomenal growth. However, more recently there has been growing interest in emerging constraints on and vulnerabilities regarding that growth. A key focus has been concern with issues of shadow banking. This article discusses one aspect of China’s finance system, which has some crossover with shadow banking: informal lending to private enterprises (PE). This lending is characteristically unstable and exhibits a number of features that constrain private enterprises. Intrinsic to those constraints are issues of usury, bribery and rent-seeking (as an expression of power), all of which bear on the institutional context of ethics. This article discusses the case of Wenzhou, the most prominent city for private enterprises in China. The Wenzhou case is explored using a narrative form drawing on multiple sources including academic papers, regulation, newspapers, and social media. This is an increasingly recognized approach within mixed methods research and this article supplies important qualitative insight into the how and why questions regarding the Wenzhou case. The Wenzhou case is typical in terms of the coexistence and interaction of formal and informal lending in China. Finally, we highlight the limits of the recent reform process and current approach to resolving the problem of financing for PEs in China.

Social Networks and Informal Financial Inclusion in the People's Republic of China

Using the 2011 China Household Finance Survey (CHFS) database, we explore the heterogeneous impacts of social networks on informal financial inclusion for urban and rural households in the People’s Republic of China. We find that social networks significantly increase the probability of households’ participation in the informal financial market, augment the size of informal financial transactions, and raise the ratio of informal lending to total household assets. We also identify the mechanisms through which social networks affect households’ participation in the informal financial market. By reducing the information cost, perceived risk, and precautionary saving, social networks play a larger role for urban households than for rural households. Notably, the effects of social networks on informal finance are strengthened by the development of the formal financial market.

Private monetary transfers between households: Who is helped and by whom?

We propose using a system of three equations with binary responses to explore the determinants of a household receiving a private monetary transfer from three different types of informal lenders in Italy. First, we observe that a semi-parametric specification of the system of equations is preferred to a fully parametric modelling approach. Second, we detect the existence of an error correlation structure that characterises the dependence of informal lenders after accounting for a number of observable covariates. Third, we find that the network of close family relationships (parents or adult children) represents the main source of an informal transfer, especially for households in debt to financial intermediaries or who are in arrears with payments and whose household head is unemployed or in poor health. Finally, we propose estimating the entity of monetary transfer in terms of expected value using a simulation that combines the joint response probabilities obtained from the system of equations with the empirical distribution of monetary transfers.