Labelled Loans, Credit Constraints and Sanitation Investments

Abstract

Credit constraints are considered to be an important barrier hindering adoption of preventive health investments among low-income households in developing countries. However, it is not obvious whether, and the extent to which, the provision of labelled micro-credit-where the loan is linked to the investment only through its label-will boost human capital investments, particularly when it is characterised by other attractive attributes, such as a lower interest rate. This paper studies a cluster randomised controlled trial of a sanitation micro-credit program in rural India, which made available lower interest loans for sanitation. The loans were linked with sanitation through their name only. The loans were not bundled with any toilet, and loan use was weakly monitored, but not enforced. Hence it is not directly obvious that the loan should boost sanitation investments. A simple theoretical framework indicates that the intervention could increase sanitation ownership through three channels-relaxation of credit constraints, salience of the loan label, or the lower interest rate. The presented empirical evidence, combined with model predictions, allow to conclude that the loan label-which to date has not received much attention in the literature-significantly impacts households borrowing and investment behaviour. Labelling loans is thus a viable strategy to improve uptake of lumpy preventive health investments.

Asset accumulation, financial inclusion and subjective well‐being: The role of financial formality in South Africa's households

“…Moreover, it provides confirmatory evidence to the assertion that insurance increases asset holding by circumventing asset depletion which could result from selling critical assets as a risk‐coping mechanism (Chetty & Looney, 2006). In addition, the findings suggesting that formal credit increased asset holding corroborated studies by Augsburg et al (2018) and Doss et al (2020). This indicated that access to formal credit such as credit cards or bank loans could improve the welfare of consumers through asset accumulation.…”

“…In summary, various theories discussed above suggest that the use of financial services including insurance, credit and savings is associated with increased asset holding. This has been confirmed by Augsburg et al (2018), Doss et al (2020), Ibrahim (2020), Kwarteng-Amaning and Sarfo-Mensah (2019) and Lee et al (2017), who showed that various channels of financial inclusion are associated with asset accumulation. Based on the theoretical prediction and empirical literature, we establish the following hypothesis: Hypothesis 1.…”

“…Such findings suggested that priority ought to be given to females in financial inclusion policies to enable equitable accumulation of assets across gender. Further, Augsburg et al (2018) examined the impact of labelled micro‐credit sanitation programmes in rural India. In that context, a labelled micro‐credit is where the loan is linked to a preventative health investment such as a toilet.…”

“…This is because access to credit enables talented consumers to invest in entrepreneurial projects that generate income which improves consumers' welfare by enabling asset accumulation, according to Shaw's (1973) debt intermediation theory. Several studies have empirically confirmed that insurance (Akotey & Adjasi, 2014;Janzen & Carter, 2019;Latif & Magazi, 2021;Tita & Aziakpono, 2017), credit (Augsburg et al, 2018;Doss et al, 2020) and savings (Abimbola et al, 2020;Ajija & Siddiqui, 2021;Ibrahim, 2020;Kwarteng-Amaning & Sarfo-Mensah, 2019;Tita & Aziakpono, 2017) contribute positively to asset accumulation among consumers.…”

Water supply and sanitation as climate action: A finance agenda

“…But reassuringly, other studies have found the same linkage. For example, three studies of Indian WSS microfinance lending programs found that they increased toilet ownership by 2.64% [5], 9% [6] and 12.4% [7] respectively.…”