Paper

Informal Credit in Village Economies: Contract Duration with Personal and Community Enforcement

Household's choice of repayment periods for accessing informal credit
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This paper provides an explanation for households' choices between informal loan contracts that:

  • Have well-defined repayment periods;
  • Are open ended.

The paper provides a description of the data analyzed for the study including:

  • Time period of the survey;
  • Location of the survey;
  • Household demographics;
  • Income sources;
  • Information on credit, labor and land agreements involving villagers.

It discusses a model for analyzing the choices for accessing informal credit repayment methods and tests a number of assumptions as follows:

  • The size of optimal fixed duration loans of two households residing in:
    • Different districts not exceeding the optimal open-ended loan;
    • Same districts exceeding the size of the optimal open-ended loans.
  • The borrowers' social networks:
    • Not influencing the terms of the loans with lenders in different districts;
    • Influencing the terms of the loans with lenders in same district.
  • Households residing in:
    • Different districts are more likely to negotiate open-ended loans when they are related or acquainted rather than when they are unacquainted with one another;
    • Same districts are no more likely to negotiate open-ended loans when they are related or acquainted than when they are unacquainted.

The paper concludes by stating that empirical work confirms:

  • Fixed duration loans are smaller than open ended loans;
  • The likelihood of negotiating an open ended loan increases with parties having a close social relationship;
  • Households living near each other are more likely to negotiate community enforced loans.

About this Publication

By Brandt, L., Hosios, A.
Published