Abstract

https://ssrn.com/abstract=2843542
 


 



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


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

September 2016

CEPR Discussion Paper No. DP11523

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.

Number of Pages in PDF File: 55

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

JEL Classification: O13, O16


Date posted: September 26, 2016  

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

Contact Information

William G. Jack (Contact Author)
World Bank ( email )
1818 H Street, N.W.
Washington, DC 20433
United States
Michael R. Kremer
Harvard University - Department of Economics ( email )
Littauer Center
Rm. 207
Cambridge, MA 02138
United States
Brookings Institution
1775 Massachusetts Ave. NW
Washington, DC 20036-2188
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Center for Global Development
2055 L St. NW
5th floor
Washington, DC 20036
United States
Harvard University - Harvard Kennedy School (HKS) ( email )
79 John F. Kennedy Street
Cambridge, MA 02138
United States
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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