Previous Loans Research Articles

Adverse selection, loan access and default behavior in the Chilean consumer debt market

Why do households use different types of loans? Which factors cause borrowers to default? Using a comprehensive survey dataset from Chile, I estimate a partial information model of consumer debt access, lender choice, loan amount and default. The model consists of a first-stage multinomial logit that explains the choice across the five loan types, plus the options of no access to debt due to credit constraints and a no wish for consumer debt. In the second and third stages, the model assumes a log-linear regression of the debt amount and a logit regression of the default behavior, accounting for the loan type selection probability. Identification is obtained using factors measured at different time periods for the default and the loan type choices. I find that households choose different lenders based on income, education and labor risks. Higher income and education decrease the probability of credit constraints, while increasing bank lending and debt amounts. Unemployment risk and household size increase the chances of all the loan types; however, unemployment decreases the debt amount. Age and wage volatility reduce the probability of all loans. Default decreases with income, education and age, whereas it increases with indebtedness, unemployment, household size, health shocks, and paying previous loans. Counterfactual exercises demonstrate that pension reform, higher requirements for borrowers’ capacities, and financial literacy programs could substantially reduce default risk. Financial literacy could greatly reduce arrears, households with credit constraints, the number of debtors and the aggregate debt amounts, especially for non-bank lending.

The Extension of Credit with Nonexclusive Contracts and Sequential Banking Externalities

Nonexclusive sequential borrowing can increase default and impose externalities on prior lenders. We document that sequential banking is pervasive with substantial effects. Using credit card applications from a large bank and data on the applicants’ entire loan portfolios, we find that an additional credit line causes a 5.9 percentage point decline in default for high-score borrowers on previous loans. However, for low-score borrowers, it causes a 19 percentage point increase. The former use the new credit to smooth payments on preexisting loans, while the latter increase their total debt. These results have implications for “ no-universal-default” regulation and financial inclusion. (JEL D62, D82, G21, G51)

An Analysis of Finnish Debtors Who Defaulted in 2014–2016 Because of Unsecured Credit Products

Consumer credit has become an important element of the economy despite the negative effects: Over-indebtedness has wide-ranging repercussions affecting consumers and society as a whole. We analysed the debt judgements (N = 4,095) of Finnish district courts from 2014 to 2016, as well as administrative data on debtors. Our focus was on the position of consumers on the credit market and their consumption-related problem debts, namely instant loans, extensive consumer credit, and credit-card as well as distance-selling indebtedness. Regarding the four credit products, first we considered the average amount of outstanding debt and then we looked at the sociodemographic and socioeconomic characteristics of the debtors. The results revealed that the average outstanding debt (€) varied according to the credit product and that the highest average amount originated from extensive consumer credit. Instant loans and distance-selling indebtedness caused debt problems especially among low-income young adults, adverse selection seemingly being one factor behind instant-loan-related debts. Extensive consumer credit and credit-card indebtedness were behind debt judgements against older consumers with a good socioeconomic position and numerous previous loans. This is a moral-hazard situation whereby borrowers may have more information about their total amounts of debt than the lenders. We suggest that, in many cases, debt problems reflect an abundant supply of consumer credit, which seems to foster asymmetric information, the consumer’s position and competence to act in the credit market, as well as various overall risk factors. The findings highlight the need to strengthen consumers’ financial skills and for loan products that meet the needs of low-credit-rated consumers. Moreover, lenders should act responsibly in the current credit market.

Consumption in the Philippines: In the Course of Unemployment and Loan Acquisition

Unemployment is one of the problems of Filipinos, which affects their consumption of goods and services since they have no income, worsened by the increasing prices in the market. Here, they tend to acquire consumer loans to support their means in obtaining their needs and wants, but due to the acquisition of previous loans and obligations to pay, they tend to adjust their consumption. Embedded from the Life-Cycle Hypothesis, Permanent Income Hypothesis and Keynesian Consumption Theory, the main objective of the research was to identify the relationship of unemployment, consumer loans per capita, real gross domestic product per capita, and inflation rate with the real household final consumption expenditure per capita in the Philippines using Ordinary Least Squares (OLS) in multiple regression analysis, and diagnostic tests in Eviews software using empirical time-series quarterly data from 2009 to 2019. This research found that unemployment and consumer loans per capita have an indirect relationship with the consumption of Filipinos. On the other hand, the gross domestic product per capita has a direct relationship. This claimed that all variables are significantly related to consumption except the inflation rate, although it showed an indirect trend. The findings exposed that Filipinos adjust their consumption to cope with no income due to unemployment, acquisition of consumer loans, and inflation rate to attain their needs and wants while having income increases their consumption. This research recommended that the Philippine government support the unemployed Filipinos by providing insurance or benefits, lessening the lending interest rate of loans, and overseeing the market prices to aid their consumption.

Microfinance competition and multiple borrowing: Evidence using panel data from Bangladesh

AbstractWe examine the causes and consequences of multiple borrowing in rural Bangladesh using long‐term household and village panel data covering the years 2000–2014. We find that the sharply growing number of microfinance institutions (MFIs) in a wider set of villages over time coincides with a corresponding increase in household borrowing from multiple MFIs and households accessing loans generally as well as significant rises in the total values of household assets, especially in the form of agricultural equipment. Although the increasing number of MFIs resulted in some households borrowing to repay previous loans, the fraction of such households is relatively small.

Developing a two-stage multi-period stochastic model for asset and liability management: A real case study in a commercial bank of Iran

In this paper, a novel two-stage multi-period stochastic model is developed to obtain a comprehensive plan. This plan aims to manage the assets and liabilities such that all legal and budget constraints are satisfied. Assets in the model include short- and long-term loans with reasonable interest rates, investments in the stock market, varied bonds with different expirations, investments in other banks, and the legal budget in the Central Bank. However, liabilities encompass all types of sight and investment deposits with different maturities. In the model, each type of deposit's amount is considered a decision variable, while its total amount is assumed to be stochastic. The mathematical model is constructed in an innovative way such that all previous loans and bonds with possible transactions in the planning horizon could be considered initial parameters. Real data for a commercial bank in Tehran, the Islamic Republic of Iran capital, are used to construct and check the optimization model. The total revenues obtained through the mathematical model and one achieved based on the experiences of financial experts in the commercial bank for four years are compared.

CREDIT INFORMATION SHARING AND PROFITABILITY OF BANKS IN KENYA

Purpose: Credit information sharing cost positively influenced the profitability of banks in Kenya. The general objective of the study was to evaluate credit information sharing and profitability of banks in Kenya.
 Methodology: The paper used a desk study review methodology where relevant empirical literature was reviewed to identify main themes and to extract knowledge gaps.
 Findings: The study stablished that borrower’s credit history information had a positive influence on the profitability in Kenya. The study the respondents agreed that their banks collect information on the number of previous applications that a loan applicant has made, the bank collects information on the number of loans applied and declined, the bank asks for reasons that the loan applied was declined for all applicants, the bank asks loan applicants to indicate the discipline observed when repaying previous loans advanced, the bank asks clients to indicate if they have delayed in remitting their periodic loan repayment in the past, the banks collect more information about the loan applicants credit history from the CRB.
 Recommendations: The study recommended that while sharing information, the banks should do a cost benefit analysis to ascertain if the sharing of such information is material or not. It should pay its attention to the administrative costs that come with sharing information. This is because the cost of information sharing as seen from the study results have a negative and significant influence on performance
 Purpose: Credit information sharing cost positively influenced the profitability of banks in Kenya. The general objective of the study was to evaluate credit information sharing and profitability of banks in Kenya.
 Methodology: The paper used a desk study review methodology where relevant empirical literature was reviewed to identify main themes and to extract knowledge gaps.
 Findings: The study stablished that borrower’s credit history information had a positive influence on the profitability in Kenya. The study the respondents agreed that their banks collect information on the number of previous applications that a loan applicant has made, the bank collects information on the number of loans applied and declined, the bank asks for reasons that the loan applied was declined for all applicants, the bank asks loan applicants to indicate the discipline observed when repaying previous loans advanced, the bank asks clients to indicate if they have delayed in remitting their periodic loan repayment in the past, the banks collect more information about the loan applicants credit history from the CRB.
 Recommendations: The study recommended that while sharing information, the banks should do a cost benefit analysis to ascertain if the sharing of such information is material or not. It should pay its attention to the administrative costs that come with sharing information. This is because the cost of information sharing as seen from the study results have a negative and significant influence on performance

ANALISIS IMPLEMENTASI TAKE OVER PADA PEMBIAYAAN HUNIAN SYARIAH STUDI KASUS PADA BANK BJB SYARIAH CABANG CIBINONG

Various factors that underlie customers transfer their KPR, ranging from customers reasons who feel that they have been disappointed to customer concerns about the uncertainty of the amount of mortgage installments at conventional banks, resulting in increased installments to be paid, as well as the customers desire to obtain additional ceiling amounts from previous loans. This research uses descriptive qualitative research methods. In this study using a conceptual approach which then used a field approach. Data collection using various methods, namely by collecting data directly from the field and also literature study. Data analysis in this research is descriptive analysis method. The results of the research show that the terms and procedures for debt transfer are based on sharia principles and in accordance with the contract provided by the bank by completing administrative requirements and carried out according to predetermined procedures. In the Cibinong branch of sharia Bjb Bank, in the case of mortgage take-over, it uses a mutanaqisah musyarakah agreement. Because this contract allows the provision of a longer financing period than murabahah financing. Fluctuating conventional bank interest rates make customer financing installments erratic and the “migrating” lifestyle is a trigger factor for customers to take over their financing.

Applying Bayesian method to investigate determinants of non performing loans of banks in Vietnam

This study was conducted to determine the factors affecting non-performing loans of commercial banks in Vietnam for the period 2007 - 2018. The study applies the Bayesian approach and the Random-walk Metropolis-Hastings algorithm to evaluate the impact of micro and macro factors on non-performing loans of commercial banks. The dependent variable is non-performing loans, which is measured by the ratio of non-performing loans divided by total outstanding loans; the independent variables in terms of bank characteristics are non-performing loans of the previous year, profitability, bank size, bak loans, and bank capital; the macro variables are inflation and GDP growth. Research data was collected from financial statements of 30 Vietnamese commercial banks and the General Statistics Office of Vietnam from 2007 to 2018. To increase the reliability and efficiency of the model as well as reasonable Bayes inference, a convergence test of the MCMC chain was performed. The result of this study shows that non-performing loans of the previous year, bank size, bank loan, bank capital, and inflation have positive impacts on bank non-performing loans. In addition, bank profitability and GDP growth rate are factors that have the opposite effects. Based on the research results, the author proposes policy implications for the decision-makers to help banks reduce non-performing loans and promote banks to operate effectively and more efficiently.

Forewarned is forearmed – repayment delays in microfinance relationships

PurposeIn order to improve the assessment of current lending policies for a microfinance institution (MFI) in Azerbaijan, the purpose of this paper is to analyse how lending conditions are adjusted based on knowledge gains during the loan relationship, with particular attention to delays in previous loans. Moreover, the paper examines what a lender can pre-determine from its own collected repayment records of clients. In addition, the repayment performances and lending policies between agricultural and non-agricultural clients are differentiated.Design/methodology/approachThe analyses are based on a rich data set of an Azerbaijani MFI. For determining the influence of previous delays on the volume rationing in the following loan, the authors apply a generalized linear model. Subsequently, the probability of recidivism is analysed by means of a logit model.FindingsThe results confirm a positive relationship between delays in previous loans and repayment problems in present loans, which is increased by the severity of the previous delay. With respect to consequences, it is shown that the borrower with previous delays faces an increase in loan volume rationing in the subsequent loan. Moreover, the authors find that the consequences of previous delays do not differ significantly between farmers and other clients.Originality/valueUntil now, the consequences of repayment delinquencies in microfinance lending relationships have hardly been investigated. This study enhances the understanding of lending policies in microfinance by focussing on relationship aspects and by simultaneously differentiating between farming and non-farming clients.

News comment: View from Brussels

EUROPE IS AT a crossroads. Should the EU - read, Germany - continue to bail out Greece, writing down previous loans and extending new ones? Or will Greece flounce out, default on its debts, re-establish its own currency and make the vulnerability of the euro project seem all the more manifest? Alexis Tsipras, the youngish new Greek prime minister, is a construction engineer by training. But what he and his team of radicals in the newly elected left-wing Syriza government are doing is pushing at the European edifice. At issue are things like the morality of the debtor versus the creditor. The Bible asks us to forgive us our debtors; the creditor can be seen as a drug pusher. And countries that have defaulted on their debts before, like Argentina in 2002, which also ditched a tie to the US dollar, have grown splendidly in subsequent years. If Greece re-established the Drachma, the currency would suffer instant devaluation against the euro, which might make Greece's exports and services competitive again. It is true that private debts denominated in euros would become harder to pay, but then who can forget the statistic that one district in rural Greece had the highest density of Porsche Cayennes in the world? Or that the EU had to use satellites to detect cheating in the agricultural claims of Greek tobacco farmers?

DECISION SUPPORT SYSTEM THE SELECTION REQUEST FOR CREDIT EMPLOYEES COOPERATIVE IN THE INDONESIA REPUBLIC (KPRI) USING AHP-TOPSIS

In this study discusses the selection of a decision support system of credit proposals, which make loans to members of the Cooperative Republic of Indonesia ( KPRI ) savings and loan. Decision support system used to aid managers in determining which members are entitled to be given a loan. Errors in granting loans to members of the cooperative will menyebebakan loss or bad credit cooperatives. The method used in this study are TOPSIS ( Technique Order Preference by Similarity to Ideal Solution ) and AHP ( Analytical Hierarchy Process ). TOPSIS is used for ranking members of the cooperative are given a loan, while the AHP is used for the weighting of the criteria used in TOPSIS. The results of this study is an application or software that can menentukkan members who make loans based on lending criteria, large installment, destination, length installment, the basic salary, the last member status, previous loans, and deposits. So that these applications can provide a solution for managers in selecting members to be given credit loans.

Bank Strategies in Catastrophe Settings:Empirical Evidence and Policy Suggestions

The poor in developing countries are the most exposed to natural catastrophes and microfinance organizations may potentially ease their economic recovery. Yet, no evidence on MFIs strategies after natural disasters exists. We aim to fill this gap with a database which merges bank records of loans, issued before and after the 2004 Tsunami by a Sri Lankan MFI recapitalized by Western donors, with detailed survey data on the corresponding borrowers. Evidence of effective post-calamity intervention is supported since the defaults in the post-Tsunami years (2004-2006) do not imply smaller loans in the period following the recovery (2007-2011) while Tsunami damages increase their size. Furthermore, a cross-subsidization mechanism is in place: clients with a long successful credit history (and also those not damaged by the calamity) pay higher interest rates. All these features helped damaged people to recover and repay both new and previous loans. However, we also document an abnormal and significant increase in default rates of non victims suggesting the existence of contagion and/or strategic default problems. For this reason we suggest reconversion of donor aid into financial support to compulsory microinsurance schemes for borrowers.

Community development plan: Rural livestock, agriculture and livelihood in Indonesia

This study aimed to determine the bio-physical and socio-economic characteristics of the community, to determine the problems encountered by the community with emphasis on livestock, agriculture and livelihood and to recommend appropriate plans of action in addressing these problems. Field observation and interviews with key informants were conducted. The data gathered served as basis in the preparation of a Community Develop-ment Plan for Lopati Village, Yogyakarta Province, Indonesia, which was the ultimate goal of the activity. In addition, this data provided guidelines in plan implementation as well as serving as a basis for determining the different changes or accomplishments to be made. Eight key informants were involved in the interview. The results showed that there are many problems faced by the community, including low income, lack of capital and credit sources, low prices of products and business management. Several plans of action that were made and proposed included strengthening of the existing farmers’ multipurpose cooperative, conversion of the farmers and women’s association into a cooperative, introduction and implementation of swine dispersal project, intensification of cattle, goat and duck raising, home industries, introduction of purely self-help projects, training workshops for farmers, youth and women, competitive farm gate prices for the community’s products, payment of previous loans, encouragement/reactivation of other banks to participate in a credit program, and general assembly meeting/monitoring and evaluation of projects/program.

Determinants of Agricultural Credit Demand and Supply among Small-Scale Farmers in Nigeria

This paper analyses the factors determining the demand for and supply of agricultural credit (loans) among small-scale farmers in south-western Nigeria. Empirical data were obtained from 270 farmers who used credit. The data were analysed using descriptive statistics and statistical models. Analysis revealed that farmers who used credit were younger (average: 47 years old), and that cultivated farm sizes (average: 3.8 ha) were larger than the national average. The statistical models showed that the interest rate, farm expenditure, the amount borrowed from alternative sources, farm size and savings were the main determinants of credit demand, while interest rates charged, the level of savings of respondents, the amount of loan demanded and the proportion of previous loans repaid were the major determinants of credit supply. In order to improve the agricultural sector, formal lending institutions should target younger farmers, including women, use group and social assets as collateral rather than physical assets, charge commercial interest rates, mobilize savings through their rural outposts and give medium-term rather than short-term loans.

Sequential Group Lending with Moral Hazard

In Grameen Bank's group lending arrangement, all agents within a group do not borrow at the same time. Agents within a group, queue for credit and their credit is conditional on successful repayments of the previous loans. In a group lending model, where all group members borrow in the same time period with joint liability contracts, if monitoring is costly and the effort is not observable to other agents within the group, the agents are able to obtain higher rents with the threat that they would collude not to monitor each other. These higher rents limit this group lending arrangement's ability to finance low productivity projects. An increase in monitoring efficiency has virtually no effect on the group lending arrangement's ability to finance low productivity projects. The paper suggests that within the group, if the agent's projects are financed sequentially, the advantage is that the threat of collusion does not keep rents high along with the disadvantage that expected output is lower. Therefore, we find that between the two group lending arrangements, sequential group lending allows the lender to finance a greater proportion of the socially viable projects if the monitoring technology satisfies a certain efficiency condition.

Women and Microcredit in Rural Bangladesh: An Anthropological Study of Grameen Bank Lending

As Rahman notes in his introduction, microcredit has become the paradigm for thinking about economic (p. 1). Since the limits of welfare-oriented approaches are now well recognized, an ever-growing wave of microlending initiatives are cloning Bangladesh's Bank model in efforts to alleviate poverty and empower the poor. Because of women's higher repayment rates and prioritization of expenditure on family welfare, many of these programs target women specifically, as a means for increasing project cost efficiency and for achieving more effective poverty alleviation. Rahman's study of one of the Bank's oldest village projects is part of a recent literature critiquing the global consensus that microlending to the poor is the key to economic development in the 21st century. Rahman challenges the unqualified success of Bank schemes based on quantitative survey studies to dispute claims that microcredit provides a cost-effective sustainable development model that improves peoples' quality of life. Instead, he argues that microlending to women, particularly, systematically fails to reach the poorest, has a limited effect on increasing household income and treats the symptoms rather than the social causes of poverty.Focusing on grassroots lending practices to women, Rahman critiques the Bank's hegemonic discourse of control that fosters a Grameen Culture through its Sixteen Decisions (code for proper behaviour) and through disciplining borrowers to consider prompt loan repayment their highest priority. His analysis makes an important contribution to the recent debates about the effectiveness of microcredit delivery as he repeatedly demonstrates how Bank culture exists within the larger structure of patriarchy that consequently retrenches partriarchal hegemony and reproduces new forms of domination over women in [Bangladesh] society (p. 51).Microcredit programmes extend financial services for self-employed livelihood projects to those who do not have access to the formal banking sector because they lack traditional forms of collateral (e.g., capital, property). To acquaint the first-time reader on microcredit with the premise of such systems, Rahman begins with a thorough explanation of the operation and philosophy of the Bank since its inception in 1976 (augmented by two Appendices); and he reviews the major studies on lending. His overview of the literature on women in development (WID) and gender and development (GAD) provides the context for his more detailed analysis of Bangladesh's gender and development projects since the early 1970s, particularly those of group-based institutional lending to women.Rahman systematically analyzes (chapters 5-7) each of the major tenets of the Bank's operation within the theoretical framework of Scott's hidden and public transcripts. Within this paradigm, he confronts the ongoing contradictions between ideology and practice in Bank culture. He persuasively demonstrates the connection between the financial success of the Bank and the debt-cycling of borrowers. The Bank's priority of achieving institutional financial sustainability through prompt and profitable returns to donors causes bank employees at the grassroots level to focus on increasing the number of loans disbursed and loan collection. This resonates with the current critique of microcredit in which financial sustainability takes precedence over social change objectives, thus undermining the goals of empowering women. By using the joint liability model of lending (e.g., peer pressure), both bank workers and group members impose intense pressure on borrowers for timely loan repayments. Many borrowers thus maintain their regular repayment schedules, but do so through a process of local recycling; that is, they pay off previous loans with new ones, often from local moneylenders charging high monthly interest rates, thereby increasing borrower debt liability. …

On the Term Structure of Sovereign‐Debt Contracts*

AbstractThis paper studies the term structure of a repudiation‐proof debt contract encompassing many sequentially scheduled short‐term loans in a principal‐agent (lender‐sovereign borrower) framework. the extension of each loan is conditional on the full repayment of the previous loans in due maturity. Both direct sanctions and loss of access to the international credit market are present as debt‐repudiation costs. It is shown that the proposed repudiation‐proof composite contract exhibiting decreasing loan sizes and increasing maturities is better for coping with the enforcement problems that characterize sovereign lending.

Quality of Life Considerations

Any discussion of the “quality of life” must first begin with the question why. Why are we asking these questions now? Why does Dr. Pearlman (J Am Geriatr Soc 31: 113–120, 1983) say “An important question is whether there are conditions in which we should convert quality of life assessments into assessments of the value of life,” and that “It may be attractive when considered as a goal.” Such questions arise in the present milieu of intense pressure to reduce the availability of health care on all levels. This can be demonstrated by observing that the number of articles on cost–benefit analysis showed a tenfold increase from the early to late nineteen seventies (Med Care 18: 1069, 1980). This increase was a direct reflection of increased political pressure for health care cost control. In sum, these attempts to define the quality of life are important primarily to those who wish to curtail the costs of health care and in so doing, deny care to certain individuals. Dr. Pearlman comes to the conclusion that we should ask the patient whether the quality of his life has any value, and that this question may play an important role in sensitive patient-oriented care. Unfortunately Dr. Pearlman knows that this is not the present milieu. His own study of euthanasia (September 1982 Ann Intern Med) to which he refers states that “One of the most expensive activities of health care is the use of sophisticated technology to support life for the elderly and disabled.” He acknowledges that this financial factor enters into the decision to withhold therapy. Physicians are under increasing pressure not to utilize expensive life-support systems. They are being showered in the medical and lay press with the argument that the elderly and disabled have a poor quality of life and thus are expendable. This is hardly “sensitive patient-oriented: care.” In this environment, asking a patient the value of his life is simply euthanasia. There is little difference between this situation and that of the propaganda movie “I Accuse” produced by the Nazis in Hitler's Germany. In this film, shown first primarily to physicians, a concert pianist with multiple sclerosis chooses suicide to save the state the expense of her medical care. Dr. J. B. Speer makes it clear that the major objective is saving the state expense. He says, “Indeed, such concerns over the social costs of medicine have brought directly into question the doctor's traditional duty to preserve life.” Clearly this is a very political issue. What are we saving money for? We would argue that the priorities of the United States Government appear to be billions of dollars yearly to the military for war, and billions to the banks as interest on previous loans. Dr. Speer also wants to define quality of life so that allowing a patient to die (withholding treatment, so called passive euthanasia) can be “given explicit visibility in a written order.” Dr. Speer is well aware of what the Nazis did in this regard as he notes, “The risks of abuse are great and, nearly 40 years after Nuremberg, still widely feared.” So Dr. Speer is trying to avoid the condemnation of the Nazi Nuremberg trials in much the same way as does Dr. Pearlman. Speer states “can one not support quality-of-life judgements in the benign in-trapersonal sense?” The difficulties of defining the patient's own views for him and the fairness of this decision-making process are obvious to Dr. Speer. He is determined nevertheless to resolve this problem. “Are not such difficulties manageable?” he asks rhetorically. The force behind the search for acceptable criteria for active and passive euthanasia does not arise from the need to expand and improve the quality of health and health services for the elderly. The attempts to legitamize euthanasia do not emanate from sincere desires for the best interests of the patients. The driving force that puts the question of determining the value and quality of our patients’ lives before us today is the political movement to reduce the social cost of health care to the aged and to allocate these funds to preparation for war. Physicians must unanimously reject this dangerous ideology. We must reject the present political priorities and struggle for expanded health care services for all. Only under conditions where a society's motivating ideology is dedicated to fulfilling the needs of the overwhelming majority of the population can we even begin to approach the question of allowing patients to die.