Labelled Loans, Credit Constraints and Sanitation Investments

49 Pages Posted: 9 May 2019

See all articles by Britta Augsburg

Britta Augsburg

Institute for Fiscal Studies (IFS); UNU-MERIT

Bet Caeyers

Institute for Fiscal Studies (IFS)

Sara Giunti

Institute for Fiscal Studies (IFS)

Bansi Malde

University of Kent

Susanna Smets

World Bank

Date Written: May 7, 2019

Abstract

Credit constraints are considered to be an important barrier hindering adoption of preventive health investments among low-income households in developing countries. However, it is not obvious whether, and the extent to which, the provision of labelled micro-credit -- where the loan is linked to the investment only through its label -- will boost human capital investments, particularly when it is characterised by other attractive attributes, such as a lower interest rate. This paper studies a cluster randomised controlled trial of a sanitation micro-credit program in rural India, which made available lower interest loans for sanitation. The loans were linked with sanitation through their name only. The loans were not bundled with any toilet, and loan use was weakly monitored, but not enforced. Hence it is not directly obvious that the loan should boost sanitation investments. A simple theoretical framework indicates that the intervention could increase sanitation ownership through three channels -- relaxation of credit constraints, salience of the loan label, or the lower interest rate. The presented empirical evidence, combined with model predictions, allow to conclude that the loan label -- which to date has not received much attention in the literature -- significantly impacts households borrowing and investment behaviour. Labelling loans is thus a viable strategy to improve uptake of lumpy preventive health investments.

Suggested Citation

Augsburg, Britta and Caeyers, Bet and Giunti, Sara and Malde, Bansi and Smets, Susanna, Labelled Loans, Credit Constraints and Sanitation Investments (May 7, 2019). World Bank Policy Research Working Paper No. 8845, Available at SSRN: https://ssrn.com/abstract=3384379

Britta Augsburg (Contact Author)

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

HOME PAGE: http://www.ifs.org.uk/centres/EDePo

UNU-MERIT ( email )

Keizer Karelplein 19
Maastricht, 6211TC
Netherlands

Bet Caeyers

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Sara Giunti

Institute for Fiscal Studies (IFS) ( email )

7 Ridgmount Street
London, WC1E 7AE
United Kingdom

Bansi Malde

University of Kent ( email )

CT2 7NP
United Kingdom

Susanna Smets

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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