Access to Capital in Rural Thailand: An Estimated Model of Formal vs. Informal Credit

This paper aims to understand the mechanism underlying access to credit in Thailand. Two important aspects of rural credit markets in Thailand are:

• Informal lenders co-exist with formal lending institutions and micro-lending institutions;
• Potential borrowers face sizeable transaction costs in obtaining external credit.

This paper develops and estimates a model based on limited enforcement and transaction cost that provides a unified view of these facts. It points out the following difficulties in accessing formal finance:

• While the average cost of accessing a formal institution is US$30, the cost of accessing an informal source is negligible;
• The cost of accessing formal finance depends on the characteristics of the household, such as proximity to the bank or whether the household has a savings account.

The paper offers the following conclusions:

• More than transaction costs, it is the limited ability of formal financial institutions to enforce contracts that explain the diversity of lenders;
• Policies designed to provide cheap credit to rural households may not be as effective as a land titling program;
• Lower interest rates will increase the number of households resorting to formal financial institutions.