Collateral, guaranties and rural credit in developing countries: evidence from Asia

Abstract

231Feder, G., Onchan, T. and Raparla, T., 1988. Collateral, guaranties and rural credit in developing countries: evidence from Asia. Agric. Econ., 2: 231-245.The paper reviews the theory of the impact of loan collateral, and in particular land collateral, in institutional and non-institutional rural credit markets. Evidence from three Asian developing countries is presented, showing extensive use of land collateral among institutional lenders in countries where such collateral is legal. The use of land collateral is more common than other forms of security, except in places where legal inhibitions on mortgaging agricultural land exist. Non-institutional lenders are less inclined to use land collateral. However, lenders who do not have links to borrowers in matters other than finance are more likely to use loan securities. Estimates of instutional credit supply and demand in rural Thailand confirm that the pledging of land collateral affects the supply of credit more than group guaranty. It is also shown that larger farmers are more likely to utilize land collateral. The conclusion is that land collateral is preferred by instutionallenders as it reduces creditworthiness assessment costs. Attempts to ban or limit collat.eraluse by decree are motivated by equity considerations, but they will cause loss of efficiency. Simplification of ownership verification and other policies reducing the transaction cost of collateral pledging will mitigate the negative equity implications of collateral.

Contemporary Challenges Facing the Small Farmers in the Green Scheme Projects in Namibia

“…Credit usually involves the risk of borrower default, and lenders therefore pursue various procedures to reduce default risk and to minimize the losses, which may be incurred in the case of default (Feder, Onchan & Raparla, 1988). Therefore, according to Stiglitz andWeiss, (1981) cited in Feder et al, (1988) screening potential borrowers according to creditworthiness criteria and credit rationing are two common policies adopted by lenders facing default risk.…”

“…Therefore, according to Stiglitz andWeiss, (1981) cited in Feder et al, (1988) screening potential borrowers according to creditworthiness criteria and credit rationing are two common policies adopted by lenders facing default risk. Feder et al, (1988) further notes that another universal procedure designed to increase the lender's expected profitability from a loan transaction is the utilisation of collateral and guaranties. It was for this reason that this study wanted to know the source of credit for the farmers and the challenges therefore to access them.…”

Collateral requirements of SMEs: The evidence from less-developed countries

“…The empirical literature on collateralisation has largely focused on developed countries, whereas only a few studies have examined this issue in the context of less-developed and transition economies. One example of a study of a less-developed economy is an investigation by Feder et al (1988) that emphasises the role of collateral in decreasing the cost of creditworthiness assessments for lenders in rural Thailand; these decreased costs increase the credit supply of the examined region 3 . Using firm-level data from Mexico, Gelos and Werner (2002) address the importance of collateral in the form of real estate for investments by firms, particularly following the financial liberalisation of that nation.…”

Do Land Market Restrictions Hinder Structural Change in a Rural Economy? Evidence from Sri Lanka

“…6 Feder et al (1988), Feder and Feeny (1991) and de Soto(2000) argue that formalization of property rights in land can potentially create collateral value and improve access to credit, though empirical evidence on this channel is mixed, at best. 7 Hayashi and Prescott (2008) and Shilpi (2014, 2015) focus on the migration costs channel; they underscore that sales and rental restrictions can significantly increase the costs of migration as a household loses its claim to future income stream from land when it leaves the village.…”

“…4 The focus of most of the studies has been on two mechanisms through which the effects of land restrictions are mediated: insecurity of property rights (Demsez (1967)), and collateral constraint due to inalienability of land (Feder and Onchan (1987), Feder et al (1988), de Soto (2000). The evidence shows that insecure and nontransferable property rights in land adversely affects incentives to undertake irreversible long-term investment and productivity (Feder and Onchan (1987), Besely (1995), Iyer and Do (2008), Holden et al (2007), Deininger and Jin (2006), Jacoby et al (2002)).…”