Three Essays in Rural Credit

Reuben Hermoso

Advisor: Carlos D Ramirez, PhD, Department of Economics

The Hub, VIP 2
April 11, 2007, 08:00 PM to 07:00 PM


This dissertation explores rural credit issues in three essays. The first essay identifies the determinants of rural credit demand and supply. The second essay examines the determinants of repayment rates in individual and institutional loans. The third essay is a literature review on policies and approaches to support rural credit access. The first essay identifies determinants of credit demand as well as formal and informal credit supply using data on rural Philippine households from a survey done by the International Food Policy Research Institute (IFPRI). Results of empirical investigations show that credit demand is influenced more by providing signals, such as group membership and housing features, rather than tangible indicators of creditworthiness such as asset ownership and professional experience. Formal lending is determined by traditional indicators of creditworthiness such as credit group membership, agricultural productivity, and collateral provision. Informal creditors allow more flexibility in lending, including servicing to newer residents and those without groups, but offset the risk by still requiring collateral and lending to more affluent areas. The differences among the three parties suggest a credit gap between formal lenders and borrowers as well as segmentation between formal and i nformal lenders. Using the same data set, the second essay identifies repayment determinants of individual and institutional loans. Regression results reveal that debtors who have strong social networks or who have higher incomes use their stature in the community to seek flexibility in repayment terms. As a result, repayment rates are generally low. But the analysis shows that repayment is positively determined by the consequences of late payment, the interest rate, and the loss of collateral if default occurs. Current repayment also improves with shocks and having more dependents to secure future credit access. The results suggest an interesting situation where households exercise flexibility when they can, leading to generally low repayment rates, but are diligent when they should be, which encourages timely repayment in some instances. The third essay is a survey of the literature on rural credit. It shows that exogenously determined rural credit programs such as targeted credit programs and interest rate ceilings achieved limited success. On the other hand, programs that accounted for local institutional conditions such as co-financing schemes and group lending have had more impact in terms of providing credit access to rural households.