Borrowing Requirements, Credit Access, and Adverse Selection: Evidence from Kenya

Michael Kremer, William Jack, Joost de Laat and Tavneet Suri

No 11523, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 forr girls.

Keywords: agriculture; Credit; Borrowing requirements; Down-payment; Collateralization; Asymmetric information; Kenya (search for similar items in EconPapers)
JEL-codes: O13 O16 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-ban, nep-dev and nep-mfd
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Citations: View citations in EconPapers (13)

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Working Paper: Borrowing Requirements, Credit Access, and Adverse Selection: Evidence from Kenya (2016)
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