Borrowing Requirements, Credit Access, and Adverse Selection: Evidence from Kenya
Creator
Jack, William
Kremer, Michael
de Laat, Joost
Suri, Tavneet
Abstract
We examine the potential of asset-collateralized loans in low-income country credit markets. When a Kenyan dairy cooperative exogenously replaced high down payments and joint liability requirements with loans collateralized by the asset itself - a large water tank- loan take-up increased from 2.4% to 41.9%. In contrast, substituting joint liability requirements for deposit requirements had no impact on loan take up. There were no repossessions among farmers allowed to collateralize 75% of their loans, and a 0.7% repossession rate among those offered 96% asset collateralization. A Karlan-Zinman test based on waiving borrowing requirements ex post finds evidence of adverse selection with very low deposit requirements, but not of moral hazard. A simple model and rough calibration suggests that adverse selection and regulatory caps on interest rates may deter lenders from making welfare-improving loans with low deposit requirements. We estimate that 2/3 of marginal loans led to increased water storage investment. Real effects of loosening borrowing requirements include increased household water access, reductions in child time spent on water-related tasks, and greater school enrollment for girls.
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http://hdl.handle.net/10822/1043498Date Published
2016-07-18Rights
All rights reserved by the author. Please contact gui2de@georgetown.edu for information about permissions.
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Georgetown University Initiative on Innovation, Development and Evaluation
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