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

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

No 22686, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Do the stringent formal sector borrowing requirements common in many developing countries restrict credit access, technology adoption, and welfare? When a Kenyan dairy's savings and credit cooperative randomly offered some farmers the opportunity to replace loans with high down payments and stringent guarantor 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 did not affect loan take up.) There were no repossessions among farmers allowed to collateralize 75% of their loans, and there was only 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 lowered deposit requirements, but not of moral hazard. A simple model and rough calibration suggests that adverse selection may deter lenders from making welfare-improving loans with lower deposit requirements, even after introducing asset collateralization. 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.

JEL-codes: O13 O16 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-mfd
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Working Paper: Borrowing Requirements, Credit Access, and Adverse Selection: Evidence from Kenya (2016)
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