Knowledge, Information, and Financial Decisions: Why Do People Choose to Finance from Informal Credit Markets?

Harold Vásquez and María del Mar Castaños ()
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Harold Vásquez: Instituto Tecnológico de Santo Domingo
María del Mar Castaños: Ponticifia Universidad Católica Madre y Maestra

Chapter 9 in Financial Decisions of Households and Financial Inclusion: Evidence for Latin America and the Caribbean, 2018, pp 279-308 from Centro de Estudios Monetarios Latinoamericanos, CEMLA

Abstract: Informal credit markets constitute an important and expensive source of household financing, especially in developing countries. In this paper, we assess how a lack of financial information and financial knowledge affect the probability that an individual will obtain credit from an informal source. We also identify some of the main factors that determine households’ financial decisions. Specifically, we use a multinomial logit framework to test how individuals’ knowledge and ability to solve basic financial problems affect their selection among formal and informal credit options. Our findings suggest that financial literacy affects financial behavior, increasing the probability of acquiring informal credit. Low income and the lack of commercial relations with banks have the same effect on households’ financial behavior.

Keywords: personal finance; informal credit; multinomial logit; financial frictions. (search for similar items in EconPapers)
JEL-codes: D14 E51 G21 (search for similar items in EconPapers)
Date: 2018
ISBN: 978-607-8582-00-6 (online)
Note: Joint Research Program of the Central Bank Researchers Network
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