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

55 Pages Posted: 26 Sep 2016  

William Jack

World Bank

Michael Kremer

Harvard University - Department of Economics; Brookings Institution; National Bureau of Economic Research (NBER); Center for Global Development; Harvard University - Harvard Kennedy School (HKS)

Joost de Laat

The World Bank - Strategic Impact Evaluation Fund (SIEF)

Tavneet Suri

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 2016

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 for girls.

Keywords: agriculture, asymmetric information, borrowing requirements, collateralization, credit, down-payment, Kenya

JEL Classification: O13, O16

Suggested Citation

Jack, William and Kremer, Michael and de Laat, Joost and Suri, Tavneet, Borrowing Requirements, Credit Access, and Adverse Selection: Evidence from Kenya (September 2016). CEPR Discussion Paper No. DP11523. Available at SSRN: https://ssrn.com/abstract=2843542

William G. Jack (Contact Author)

World Bank ( email )

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Michael R. Kremer

Harvard University - Department of Economics ( email )

Littauer Center
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Brookings Institution

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National Bureau of Economic Research (NBER) ( email )

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Center for Global Development

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Harvard University - Harvard Kennedy School (HKS) ( email )

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Cambridge, MA 02138
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Joost De Laat

The World Bank - Strategic Impact Evaluation Fund (SIEF) ( email )

United States

HOME PAGE: http://www.worldbank.org/sief

Tavneet Suri

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States

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