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

80 Pages Posted: 3 Oct 2016

See all articles by William Jack

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

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.

Suggested Citation

Jack, William G. and Kremer, Michael R. and de Laat, Joost and Suri, Tavneet, Borrowing Requirements, Credit Access, and Adverse Selection: Evidence from Kenya (September 2016). NBER Working Paper No. w22686. Available at SSRN: https://ssrn.com/abstract=2846902

William G. Jack (Contact Author)

World Bank ( email )

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Michael R. Kremer

Harvard University - Department of Economics ( email )

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Brookings Institution

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Center for Global Development

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Joost De Laat

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

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Tavneet Suri

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

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Cambridge, MA 02142
United States

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