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– The purpose of this paper is to examine how shocks suffered by rural households in Ethiopia influence their decision to borrow and the source of credit.
Abstract
Purpose
The purpose of this paper is to examine how shocks suffered by rural households in Ethiopia influence their decision to borrow and the source of credit.
Design/methodology/approach
First, suppose a household faces a set of four borrowing alternatives: only formal borrowing, only informal borrowing, both formal and informal borrowing, and non-borrowing. Second, the paper assumes that the random component is independently and identically distributed in accordance with the extreme value distribution. These assumptions lead to the multinomial logit model. The paper estimates the model using data from a survey of 350 rural households in Southern Ethiopia.
Findings
The paper finds that shocks are important factors in explaining both the decision to borrow and the source of credit. In particular, negative shocks that affect household's assets, such as the seizing of farmland and theft, or human capital, such as the death of the family head, reduce the probability of borrowing from formal lenders or from both formal and informal lenders at the same time. The study supports only to some extent the assumption that informal credit contributes to smooth consumption. Last, networking effect is very significant and demonstrates how the two markets interact.
Research limitations/implications
A model that would consider dynamic consumption patterns would have been more appropriate. In fact, one of the limitations of the study is the reliance on a cross-section analysis and the data is limited to just one village. Further research would extend the data set geographically and across time.
Practical implications
The formal lenders are not willing to provide contingent loans, maybe because of a limited ability to assess and diversify risk. Besides, the available formal credit products are not proper to finance long term risk management strategies but pesticides, fertilizers and improved seeds that are entirely used in every agricultural cycle. In this regard, proper risk transfer strategies and instruments, as well as better tailored loan products, are needed in order to increase outreach into the rural areas.
Originality/value
To the authors’ knowledge, this is the first paper that investigates how shocks influence the decision to borrow and the source of credit in Ethiopia.
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Informal credit markets are very active in many developing countries, including China. Informal financial associations have become a major channel of borrowing. Using data from…
Abstract
Purpose
Informal credit markets are very active in many developing countries, including China. Informal financial associations have become a major channel of borrowing. Using data from the 2006 Rural Household Survey, the purpose of this paper is to investigate farmers' borrowing choices between banks, relatives/friends and informal associations.
Design/methodology/approach
A simultaneous equation system is estimated using three‐stage least squares to study the determinants of borrowing from varying sources and how they are related to each other.
Findings
The results show that the relationship between the probability of formal credit market participation and age follows an inverted U‐shaped pattern. Education, which serves an indicator of future income, is not significant in any setting. Borrowing from informal associations seems to stand alone and neither of the other two sources has an effect on its success rate. In addition, borrowing from informal associations works as a substitute for borrowing from relatives/friends but not vice versa.
Originality/value
In this paper, borrowing from various sources is incorporated in a system of equations; thereby contributing to a better understanding of credit markets in China by providing a bigger and complete picture.
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Nguyen Huu Thu, Pham Bao Duong and Nguyen Huu Tho
This study aims to examine the accessibility, loan purposes and effects of informal credits on poor households in Northern mountainous Vietnam.
Abstract
Purpose
This study aims to examine the accessibility, loan purposes and effects of informal credits on poor households in Northern mountainous Vietnam.
Design/methodology/approach
This study used primary data collected directly from surveying 402 poor households in Thai Nguyen province using a well-designed questionnaire. The probit model is employed to specify which factors affect access to informal credit, the tobit model is used to estimate the borrowing functions specified. In addition, descriptive statistical analysis is also used to describe the accessibility, purposes and effects of informal credit on poor households.
Findings
The results show that there is a considerably high proportion of informal borrowings from relatives, neighboring villagers, professional moneylenders, rotating saving and credit groups, trade credits and mortgages. Labor force ratio, social capital and residential land areas are the key determinants of poor households' informal borrowings. The purposes of borrowing are diverse. The informal loans also have certain significant effects on poverty reduction and the welfare of poor households.
Research limitations/implications
The effects of the informal loans on house welfare should be quantitatively evaluated.
Practical implications
The findings from these analyses allow us to draw relevant policy implications for the development of rural finance in other low-income, developing countries.
Originality/value
This research contributes to the body of published literature in several ways. Firstly, it provides understanding of the performance of the informal financial subsector. Secondly, the informal subsector of rural finance is evaluated in close relation to the formal subsector.
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The purpose of this paper is to investigate how many rural women have access to finance. It also explores the additional constraint faced by them in accessing the credit.
Abstract
Purpose
The purpose of this paper is to investigate how many rural women have access to finance. It also explores the additional constraint faced by them in accessing the credit.
Design/methodology/approach
For the estimation purpose, multivariate logit regression is used, taking borrowing any credit as dependent variable.
Findings
Results indicate that women lack easier access to formal credit and the socio‐economic, cultural background of the family significantly impact probability of borrowing. More specifically, result indicates that female own age, marital status and employment bring self‐confidence and reliability that encourage female borrowing.
Research limitations/implications
In the absence of any recent nation‐wide data about micro‐credit, cross‐section survey, the Rural Financial Market Survey is used to examine the factors affecting the demand for borrowing.
Practical implications
This paper proposes that government should implement education programmes in order to create awareness towards role of women in economic development. Moreover, to overcome the cultural constraints, information should also be disseminated through influential media.
Originality/value
While it is widely recognized that, demand for credit is severely affected by socio‐economic, cultural and personal characteristics, this has rarely been confirmed earlier. There are numbers of studies documented on borrowing all focus on the issue of formal and informal sources ignoring the above determinants. This paper attempts to do so.
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Calum G. Turvey, Rong Kong and Xuexi Huo
The purpose of this paper is to investigate the economic significance of informal borrowing between friends and relatives in rural China. Guided by an economic model of household…
Abstract
Purpose
The purpose of this paper is to investigate the economic significance of informal borrowing between friends and relatives in rural China. Guided by an economic model of household‐production interactions, the paper provides results from a survey of over 1,500 households including general linear model and logistic regression results. The paper finds evidence of a “small farm bias” in the use of informal credit, but the paper cannot generalize this to credit rationing as a matter of course. In part, it is believed that a preference for informal borrowing is related to some forms of credit rationing, spillover effects and collateral as some literature suggests, but the results suggest that by no means are these mutually exclusive or exhaustive.
Design/methodology/approach
This paper uses regression techniques based on 1,557 farm household surveys gathered by the authors in Shaanxi, Gansu and Henan Provinces in 2007 and 2008.
Findings
The paper argues that informal lending amongst friends and relatives cannot be dismissed as a significant economic factor in the financing of China's agricultural sector. A small farm bias in formal lending is indicated by the results, but there are many factors other than credit rationing which affect a households' decision to borrow informally.
Research limitations/implications
The research is limited to the survey data used. China's agricultural economy is too large to assert that the informal‐formal relationships described herein are general, even though the results are supported by other research.
Practical implications
The paper makes the case that the study of agricultural finance in China should include informal lending as part of any credit study. In addition, the paper argues that the use of the term “informal lending” should not generally group familial lending with other forms of interest‐bearing loans such as pawn shops or money lenders.
Social implications
China's rural credit needs are huge and many farmers do not have access to formal credit. This paper argues that the strength of trust relationships between friends and family is sufficiently high that nearly 60 percent of all credit outstanding is between friends and relatives at zero interest rates.
Originality/value
This, it is believed, is one of the first comprehensive studies on informal lending in China.
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The purpose of this paper is to explore the changing role of housing wealth from an investment vehicle to a welfare resource. It also considers the implications of economic…
Abstract
Purpose
The purpose of this paper is to explore the changing role of housing wealth from an investment vehicle to a welfare resource. It also considers the implications of economic prosperity and decline in the UK on homeowners, intentions of equity withdrawal, and the consequences of managing household budgets.
Design/methodology/approach
The paper takes the form of a quantitative longitudinal analysis of national data and panel survey, including random effects logistic regression model.
Findings
Housing wealth is increasingly being used as a financial safety net across the life course. Homeowners are equally likely to have engaged in equity‐borrowing episodes during periods of economic prosperity as they are during periods of decline; particularly, lone parents with non‐dependent children and unemployed people. Housing tends to be used as a last resort once other forms of credit have been exhausted.
Research limitations/implications
There are data constraints; equity withdrawal can only be calculated from 1994 and the latest wave of data available is 2008. The research is not therefore able to consider the full extent of the consequences of the current recession, however, it does provide an indication of the problems that may emerge.
Social implications
Social implications arise from the concentration of resources into housing wealth; homeowners may suffer through having increased debt and there are implications for financial and sustainable welfare policy where home ownership is positioned as a nation's welfare resource.
Originality/value
The paper draws upon the author's recent work (in collaboration with others) which offers insights into the motivations for equity borrowing. This paper offers an original contribution through presenting empirical evidence on the effect of economic prosperity and economic decline on household behaviour, and adds new insights in respect of the implications for households who rely on housing wealth in the context of the current recession.
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Rofikoh Rokhim, George Adam Sukoco Sikatan, Arief Wibisono Lubis and Mohammad Irwan Setyawan
This study aims to investigate whether microcredit programme has a positive impact on productive poors. Several areas of investigation include clients’ borrowing behaviour, level…
Abstract
Purpose
This study aims to investigate whether microcredit programme has a positive impact on productive poors. Several areas of investigation include clients’ borrowing behaviour, level of savings and before-and-after psychological well-being comparison.
Design/methodology/approach
A case-study survey of 398 clients of a microcredit programme run by a charity organisation in Jakarta, Indonesia, was conducted in 2012. Descriptive statistics and cross-tabulation analyses were then performed to show the variation of different variables among the respondents and how they correlate with socio-demographic indicators.
Findings
The result shows an indication that microcredit brings positive impact on the clients’ welfare; however, the effect is not linear and there might be an optimum borrowing frequency. Moreover, the output also suggests that age, level of income and level of savings are three important determinant of borrowing behaviour.
Research limitations/implications
Although the result can be justified, it is necessary to be cautious about its generalisability because of limited number of sample and non-randomised sample selection.
Originality/value
Although the microcredit programme examined in this study has been operating since 2010, there is by far no comprehensive study to assess its impact on the welfare of the clients. This study attempts to fill in the gap by providing an analysis on how microcredit programme increases the welfare of the clients. In addition, as part of the continuous improvement programme, the study also identifies a number of factors that might indicate the clients’ borrowing behaviour.
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The main purpose of this study is to investigate the impact of housing price on mortgage debt accumulation while considering the structural break effects associated with the…
Abstract
Purpose
The main purpose of this study is to investigate the impact of housing price on mortgage debt accumulation while considering the structural break effects associated with the Global Financial Crisis (GFC).
Design/methodology/approach
To determine the existence of a long run relationship among the variables, this study used a Johansen cointegration test. The long run model was then estimated using the fully modified ordinary least square method and reported for both the model with and without a structural break associated with the GFC.
Findings
The findings demonstrate a moderate positive relationship between housing price and mortgage debt, with the impact of the GFC is positive but insignificant. The household’s lack of responsiveness to the GFC may be attributed to their optimistic expectations and confidence in the Malaysian housing market.
Practical implications
Findings of this study provide some guidance to policymakers and the banking sector in predicting household borrowing behavior during future economic crises.
Originality/value
The increase in housing prices and mortgage debt after the GFC has been a concern for many countries, including Malaysia. This study contributes to the literature by investigating the relationship between housing prices and mortgage debt in Malaysia and sheds light on the impact of the GFC on household borrowing behavior. The study’s contributions include providing new evidence to the underexplored topic, enhancing the robustness and reliability of the empirical results and providing insights into the importance of testing for structural breaks in time series analysis.
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Gianni Betti, Neil Dourmashkin, Mariacristina Rossi and Ya Ping Yin
This paper seeks to measure and characterise the extent of consumer over‐indebtedness among the European Union (EU) member states.
Abstract
Purpose
This paper seeks to measure and characterise the extent of consumer over‐indebtedness among the European Union (EU) member states.
Design/methodology/approach
The study evaluates alternative measures of over‐indebtedness on the basis of the permanent‐income/life‐cycle theories of consumption behaviour and adopts a subjective approach in identifying over‐indebted households on the basis of European household survey data. It then investigates the main characteristics of over‐indebted households.
Findings
The empirical results reveal that over‐indebtedness was a significant problem across EU member states in the mid‐1990s. Moreover, an inverse relationship emerged between the extent of the over‐indebtedness problem and the extent of consumer borrowing across EU countries.
Research limitations/implications
Anecdotal evidence seemed to suggest that some main factors behind over‐indebtedness could be “market failure” on the credit market, the existence of liquidity constraints and lack of access to formal credit markets. However, a comprehensive and rigorous investigation of the extent and determinants of over‐indebtedness can only be achieved through analysis of more extended household data sets, particularly panel data.
Practical implications
The EU credit markets exhibited certain symptoms of “market failure”, on the one hand, and there was also need for further financial liberalisation in the Southern European countries, on the other hand.
Originality/value
The paper provides a first systematic evaluation of existing measures of consumer over‐indebtedness as well as the first EU‐wide empirical investigation of the problem. It should provide valuable information to the credit industry as well as financial regulatory bodies.
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Alexandros P. Bechlioulis and Sophocles N. Brissimis
The authors examine the optimal consumption decisions of households in a micro-founded framework that introduces endogenous default. They study default in the context of a…
Abstract
Purpose
The authors examine the optimal consumption decisions of households in a micro-founded framework that introduces endogenous default. They study default in the context of a two-period process, assuming three non-overlapping steps of non-payment: delinquency, non-performing loans and bankruptcy (default).
Design/methodology/approach
In their model, the authors extend the analysis of loan default to two periods and include agent heterogeneity by considering also saving households. In the optimization problem, the authors obtain first-order conditions for borrowers who do not repay all of their loans (comparing them to those who fully repay them) and also for savers. In addition, by using nonlinear Generalized Method of Moments (GMM), they obtain consistent estimates of the household preference parameters and present the impulse responses of borrowers' consumption to demand shocks.
Findings
The authors derive an augmented consumption Euler equation for borrowers, which is a function inter alia of an expected default factor. They estimate this equation and find non-negligible differences in preference parameters relative to values reported in the literature. Further, an ordering by size of the household discount factors is provided empirically. Finally, the impulse responses of borrowers' consumption to a demand shock are found to last more for borrowers who do not fully repay their debts.
Originality/value
This work represents a promising line of research by introducing default in one of the basic components of DSGE models, making the latter more appropriate for analyzing monetary and macro-prudential policies.
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