Informal Loans Research Articles

Confirmatory factor modeling on consumer buying behavior of rural credits in rural karnataka: theory of planned behavior as a reference

Many financial institutions including government institutions are grappling up to meet financial/banking demands. One of the hurdles could be lack of understanding consumer’s financial requirements by financial institutions. On the consumer side, many do not have sufficient financial literacy or formal education and lack experience in handling financial products. The result of this gap is leading to slower adaptation of financial products even though higher demand for financial products is a reality. The purpose of the research to explore various items of measurement pertaining to theory of planned behavior. Data was collected from target rural areas for this purpose. EFA was carried to on 27 indicator variables obtained from literature review. Three items were dropped, and six factors were extracted through EFA. Further reliability was established for six factors during EFA. In the next stage, confirmatory factor analysis (CFA) was carried out to establish measurement model fit. Path analysis between item variables and factors was carried out to check for critical ratios. During CFA, reliability test was carried out again using cronbach’s alpha and maximum reliability (H). Followed by convergent and discriminate validity check. The researcher has found that banks need to focus on small borrowers as some of them have good capacity to repay loan with interest. It was observed that regional rural banks have excessive documentation work and also It was observed that rural borrowers still rely heavily on informal loan distributors. The researcher felt that problem of recovery can be resolved through adopting systematic loan applications screening .The researcher suggested based on observation that banks should not be required to furnish any security except personal security

The Influence of Social Capital on Farm Household’s Borrowing Behavior in Rural China

This paper evaluates whether social capital affects the ability of farm households to obtain formal and informal loans. We test for the impact of two measures of social capital. The first measure, kinship, captures the traditional aspects of bonding social capital in rural areas that might affect the probability of getting informal loans. As the economic reforms in China have changed the traditional rural way of life and weakened the role of kinship, more mobile farmers are likely to develop a different kind of social capital also based in the Chinese tradition but not focused exclusively on kin. This friendship social capital is hypothesized to affect farmers’ ability to get both formal and informal loans. We use the Chinese Household Finance Survey data from 2013 and estimate the probability of obtaining credit, while also accounting for the reverse causality. In addition, we use the Heckman selection model to establish how social capital affects not only the probability of getting loans but also the size of the loan. Empirical results suggest that social capital affects borrowing by farm households. In particular, the friendship social capital has a positive effect on farm household’s ability to get formal loans, and has a substitution effect on informal borrowing, while kinship has a positive effect on farm households’ ability to get informal loans. Friendship and kinship are positively associated with the amount of a farm household’s formal and informal loans, respectively.

The insurance premium in the interest rates of interlinked loans in a small-scale fishery

AbstractInterest payments based on income flows are a common feature of informal loans. Such so-called ’interlinked loans’ can be seen as insurance against very low disposable incomes, as interest payments are lowest when income turns out to be low. This paper examines whether interlinked loans indeed contain an insurance premium and how those premia are determined. A simple theoretical model predicts that interest rates of interlinked loans increase with income volatility when insurance premia exist. Based on data from a small-scale fishery in India, calculations show that, on average, lenders receive 25 per cent of the income, which corresponds to an average interest rate of 49 per cent p.a. A panel data analysis confirms theoretical predictions that interlinked loans contain an insurance component paid by the borrowers.

The Insurance Premium in the Interest Rates of Interlinked Loans in a Small-Scale Fishery

Interest payments based on income flows are a common feature of informal loans. Such so-called 'interlinked loans' can be seen as an insurance against very low disposable incomes, as interest payments are lowest when income turns out to be low. This paper examines whether interlinked loans indeed contain an insurance premium and how those premia are determined. A simple theoretical model predicts that interest rates of interlinked loans increase with income volatility when insurance premia exist. Based on data from a small-scale fishery in India, calculations show that on average, lenders receive 25% of the income, which corresponds to an average interest rate of 49% p.a. A panel data analysis confirms theoretical predictions that interlinked loans contain an insurance component paid by the borrowers.

Social capital as a coping mechanism for seasonal deprivation: the case of the Monga in Bangladesh

The extreme hunger and deprivation that recurs every year in the lean season in northern Bangladesh, locally known as the Monga, is mainly due to the malfunctioning local labor and credit markets. Using data covering 5600 extreme poor households in the Monga-prone region, we investigate in detail the role of social capital in securing employment and obtaining informal loans. Correcting for the endogeneity of social capital by the heteroscedasticity-based method proposed by Klein and Vella (J Econom 154:154–164, 2010) and also by the standard IV method for a robustness check, we document that social capital plays an important role in obtaining both wage- and self-employment. We also document a weak negative effect of social capital on obtaining informal loans. We explain our results in terms of the role of horizontal and vertical components of our measures of social capital in influencing different outcomes.

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.

Children's schooling in Nicaragua: What is the link between educational achievement, borrowing, and gender?

AbstractThe impact of credit has been widely studied, and yet little is known about the effect of formal versus informal loans. In this paper, we contrast the two and their impact on children's schooling using longitudinal data from Nicaragua. To address endogeneity, we utilize both household fixed effects and locality–year fixed effects. Our results indicate that, on average, children from borrowing households fare worse than children from nonborrowing households, with male borrowers having a disproportionately negative effect on boys, and vice versa for girls and female borrowers. Informal credit is found to have a protective effect on school attendance, but the effects of formal and informal credit on cumulative schooling are found to be statistically equivalent. However, this appears to mask considerable heterogeneity within informal borrowing.

Dependence of Informal Interest Rates and Level of Lenders’ Influence in the Informal Loan Market in Thailand

Informal finance with usurious interest rates seems to be the last resort for the poor in many developing countries. In Thailand, informal credit lenders can freely set up extortionate interest rates and use controversial enforcement actions to pressure borrowers to repay loans, because that legal enforcement is not practical due to the low punishment levels for those lenders. Despite widespread interest in the determinants of the informal interest rates, it remains a largely unexplored area. This study investigates whether level of lenders’ influence over the borrower, and some characteristics of the borrowers, are related to informal interest rates, enabling the rates to be classified into particular categories. Ordered logistic regression is used to analyze the data. The investigation was based on information collected in a survey presented to a sampled population of 694 participants from Bangkok, Nonthaburi, Phathum Thani, and Samut Prakan where the number of informal loans during the last seven years is highest when compared to other regions of the country. The results suggest that the level of lenders’ influence over the borrower in order to obtain a loan correlates with the informal interest rates applied. Moreover, some characteristics of a borrower, i.e., debt-to-income ratio and high level of familiarity between an informal lender and a borrower, also significantly affect the rates.

A cash-constrained stochastic inventory model with consumer loans and supplier credits: the case of nanostores in emerging markets

We consider a small traditional retailer that is managing its inventory under strict cash constraints, mainly because typically informal loans are offered to customers. These stores are widely present in emerging markets, and we refer to them as nanostores (also called ‘mom-and-pop stores’). As the suppliers require immediate payments for goods delivered, a nanostore can only replenish products to the level for which it has on-hand cash available. To improve delivery efficiency, a supplier might offer a nanostore credit for its replenishments. However, currently, suppliers are often reluctant to do so as these nanostores quickly go bankrupt or disappear, hence defaulting on all outstanding credits. The objective of this paper is to determine when it is beneficial to offer supplier credits. We propose a multi-period, stochastic inventory model, and numerically compare scenarios with and without supplier credits. Our study shows that even in the presence of this risk, suppliers often have good incentives to provide these credits, even if interest is not incurred. For this to hold, the operations of the retailer should be (a little) profitable in the first place, for which we provide analytical conditions.

DEFICIT DE ALFABETIZAÇÃO FINANCEIRA INDUZ AO USO DE EMPRÉSTIMOS EM MERCADOS INFORMAIS

RESUMO A literatura de finanças documenta associações entre alfabetização financeira de famílias e sua propensão a tomar empréstimos. Contudo verifica-se predominância de estudos que se concentram exclusivamente em mercados formais de crédito. Com base em 2.023 observações sobre comportamento financeiro de famílias brasileiras, examinamos impactos da alfabetização financeira sobre a tomada de empréstimos em mercados informais, tais como empréstimos obtidos com amigos/conhecidos, ou mesmo agiotas. Com o emprego de modelos logit multinomiais, mensuramos os efeitos da alfabetização financeira sobre a propensão a tomar empréstimos na informalidade, comparando dois grupos: famílias que não contrataram nenhum tipo de empréstimo, e aquelas que tomaram empréstimos bancários. Adotou-se como proxy para o nível de alfabetização financeira o consumo de um produto financeiro encontrado no mercado brasileiro, o título de capitalização. Os resultados sugerem que a alfabetização financeira pode ter maior relevância na propensão a empréstimos informais comparativamente ao crédito formal.

(Dis)advantages of informal loans – Theory and evidence

We study borrowers’ choice between formal and informal credit in a setting with imperfect debt enforcement. In contrast to formal loans (e.g., from banks), informal loans (e.g., from friends or relatives) can be enforced by the threat of severing social ties. If the underlying social capital is sufficiently large, we show that informal loans carry lower interest rate and collateral than formal loans, including the possibility of zero interest and collateral. This makes informal credit a priori more attractive to borrowers. At the same time, since physical collateral is divisible unlike the social capital pledged in informal credit, default on formal loans is less costly to both parties than default on informal loans. Because of this trade-off, formal and informal credit can co-exist depending on the loan riskiness measured by the ratio of loan size to borrower’s wealth (LTW ratio). Borrowers choose formal credit for riskier (larger) loans while informal credit is preferred for (smaller) projects with low default risk. Empirical results using household data from rural Thailand are consistent with the predicted choice pattern and terms of formal and informal credit.

Deductions and counter-deductions in South Africa

The real economy as a concept has taken root not only in highly developed economies but also in those characterized by “the rapid growth of aspiration accompanied by massive incorporation of people into the current market economy, through the expansion of indebtedness and financial devices … [and] the impossibility to pay,” where plural and shifting scales coexist (Neiburg and Guyer, this volume), and where there “is interplay between different units of measure and scales” (Neiburg 2016: 82). This plurality, in the South African case, means official figures fail to capture the true extent of borrowing and lending and the way state salaries and grants serve as collateral for apparently informal loans. Attempts to regulate or improve the situation, aimed at controlling “reckless lending,” have problematized the debtor as unaccustomed to the idea of repayment. Rather than being excluded from the mainstream economy, however, debtors are in danger of being wholly incorporated into it—but with the disadvantage ...

Discrimination, Social Capital, and Financial Constraints: The Case of Viet Nam

Summary This paper examines the relationship among gender, social capital, and access to finance of micro, small, and medium enterprises in the manufacturing sector in Viet Nam. Our dataset is from the 2011, 2013, and 2015 results of the Micro, Small, and Medium Enterprise Survey in Viet Nam. Using the Heckman technique to control for sample selection bias, the estimates do not provide evidence for discrimination against female-owned enterprises in the formal lending market. Specifically, female entrepreneurs have a higher probability of getting a loan and they pay lower interest rates in comparison with male entrepreneurs. No discrimination in formal credit markets may arise from the preference for informal loans over formal loans as entrepreneurs tend to borrow informal loans before applying for formal ones. Further analysis shows that social capital could facilitate loan applications: firms that have a closer relationship with government officials and other business people can get loans of longer duration.

Coping up with the Risks and Increasing Sustainability: Strategies for Small-scale Shrimp Farming in Indonesia

Small-scale shrimp farmers have contributed significantly in increasing shrimp production in Indonesia. However, they face various risks that resulted to high fluctuation in their income. Risk management strategies in shrimp farming are needed to cope with inherent risks in order to enhance sustainability of shrimp farming. This study analyzed the sources of risks, ex-ante risk management and ex-post risk coping strategies in small-scale shrimp farms in Indonesia. A field survey of 166 shrimp farmers was conducted in the North and South coastal zones of East Java. Results revealed that the top three sources of risks that influenced in shrimp farming were shrimp price volatility, high mortality due to diseases, and increasing formulated feed price. Requesting for government technical assistance was the common formal on farm risk management strategy used by the shrimp farmers. Sharecropping was the main ex-ante strategy to mitigate risk. Small-scale shrimp farmers tended to avail of informal loans that resulted to loss of savings. They also used family labor as informal ex-post strategy to reduce expenses. They used social assistance from the government as formal ex-post risk coping strategies.

Informal Loans, Liquidity Constraints and Local Credit Supply: Evidence from Italy

Using data from the Italian Survey on Household Income and Wealth from 1995 to 2014, we study the relation between informal credit (loans from relatives and friends) and a household's access to bank credit. While most of the literature has focused on the substitutability channel, we highlight that even households with full access to the formal credit market are more likely to be indebted to relatives or friends when compared to those not interested in formal loans. This complementarity is stronger for households who have problems paying back their loans, suggesting the presence of a caretaker effect on the part of relatives and friends towards distressed families. Finally, we estimate the overall impact of an expansion of local credit supply on the diffusion of informal loans, using an IV approach. The results suggest that the complementarity effect prevails, but the positive effect on informal loans is economically very small.

Determinants of the conditional probability that a household has informal loans given liquidity constraints regarding access to credit banking channels

We use a semiparametric bivariate probit model to explore the determinants of the conditional probability that a household has informal loans given objective or subjective liquidity constraints regarding access to credit through banking channels. In our empirical study, we use Italian microdata on household income and wealth covering the 1995–2014 period. Our results emphasize that the most important trigger factors influencing the conditional probability of interest are debts in the form of both mortgage(s) and loan(s) and the unemployment status of the household head. Other trigger factors include a young age of the household head, residence in a large municipality, no home ownership (paying rent or free use), an equivalent income lower than 10,000 Euro, and a ratio of liquid assets to net annual income very close to zero. Understanding the factors associated with a household’s probability of taking out informal loans is important to gain knowledge about a phenomenon that is not tracked by official statistics. This knowledge is also useful to practitioners and policy-makers interested in providing new tailored financial services or solutions for reducing poverty risk.

Can the availability of informal loans be detrimental to microloan repayment?: Some empirical evidence from Bangladesh

Prior to the introduction of microcredit system, informal loans were the major sources of credit for the poor. Even after the introduction of microfinance institutions, informal loans have been playing a significant role in credit market for the poor in developing countries. Household level micro data from Bangladesh shows that currently the major sources of informal credit are relatives, neighbors, and Mahajans, who are non-institutional professional money lenders. Mahajans are much more powerful in the society than the poor borrowers. While interest rates are relatively low for loans from relatives and neighbors, they are much higher for loans from Mahajans. This study explores whether or not the availability of informal loans has any effect on the repayment of microloans. In order to test the impact of multiple informal loans on the microloan repayment by a client, this study uses household level micro data from Bangladesh. The data shows that about twenty percent of the micro-borrowers borrowed at least once from the relatives and about thirty percent of the micro-borrowers borrowed at least once from the neighbors. This study uses gender, age, and education of the borrowers along with reasons for borrowing as control variables. By using an ordered logit model, this study finds that a micro-borrower’s access to low-interest informal loans, such as loans from relatives or neighbors, does not significantly deter them from repaying microloan. Taking high-interest informal loans such as the Mahajan loan, which may be indicative of financial trouble of the micro-borrower, however, lowers the probability of microloan repayment. This study finds that giving further microloan during the financial trouble of a microborrower can increase the probability of loan repayment. This study also finds that the probability of microloan repayment is higher for women, more educated individuals, relatively older people, and for borrowers with small amount of loans. These are significant findings, because loan recovery is important for the sustainability of microfinance institutions. In future, if the informal loans become almost non-existent, which is unlikely in Bangladesh context, the microfinance institutions will have to be less concerned about the impact of informal loans on them as the number of such borrowers will be very small. Until then, the findings of this study will remain significant for Bangladesh. Furthermore, the conclusions based on this data may be applicable to many other countries with similar institutional environment. This paper may help microfinance institutions in designing the optimal microloan contracts and improving loan recovery rates by taking into account the role of various types of informal lenders that exist in all developing countries.

Justification of the Coexistence of Formal and Informal Reciprocal Loans in Developing Countries

This paper provides a new justification for the coexistence of formal and informal reciprocal loans in developing countries. We develop an investment model capable of comparing the financing costs of different financing alternatives. Notably, the reciprocal feature of interest-free loans from friends imposes an agnostic obligation on the borrower and generates implicit financing costs. The diverse financing outcomes hinge on the comparison of the explicit costs of formal loans and the implicit costs of reciprocal loans from friends.

Climate variability, the proliferation and expansion of major livestock diseases in East Gojjam, Northwestern Ethiopia

This study explores the link between climate variability and its effect on livestock production and system. Mixed research method was used to explore and explain the problem. Data were collected from both primary and secondary sources. The results of the study show that farmers have perceived an increase in temperature and the erratic behaviour of rainfall in its onset, cessation and intensity over time. The study reveals tick and tick borne diseases, trypanosomiasis and epidemics of infectious diseases such as anthrax and blackleg occurred frequently. Deterioration of pasture, diseases and resource scarcity are major constraints for livestock development. Livestock are kept for drafting, manure, milk, meat, packing, means of income and transportation. Multifunctional of the sector is complemented with other livelihoods and used to diversify their economic interest and open access to informal loan. Thus, the sector acts as insurance against shocks.

The role of remittances as a risk-coping mechanism: Evidence from agricultural households in rural Philippines

This paper investigates whether agricultural households in rural Philippines insure their consumption and use remittances, informal loans or assets as ex post risk-coping mechanisms. Since these households have limited access to formal insurance and credit markets, any shocks to their volatile income can have substantial impacts. Using panel data and rainfall shocks as the instrumental variable for income shocks, this paper finds evidence that households depend on their networks of family and friends to partially insure their consumption. The analysis shows that approximately 27 percent of consumption is insured. International remittances from migrant members replace about 11 percent of income decline while domestic transfers replace about 14 percent. Informal loans, however, decrease as rainfall shocks increase. Borrowers and lenders may be experiencing similar shocks, which would reduce the effectiveness of local risk-sharing arrangements.