Lending to the Unbanked: Relational Contracting with Loan Sharks

40 Pages Posted: 15 Jun 2020 Last revised: 16 Jun 2020

See all articles by Kevin Lang

Kevin Lang

Boston University - Department of Economics; National Bureau of Economic Research (NBER)

Kaiwen Leong

Nanyang Technological University (NTU)

Huailu Li

Fudan University, School of Economics

Haibo Xu

Tongji University

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Abstract

We study roughly 11,000 loans from unlicensed moneylenders to over 1,000 borrowers in Singapore and provide basic information about this understudied market. Borrowers frequently expect to repay late. While lenders do rely on additional punishments to enforce loans, the primary cost of not repaying on time is compounding of a very high interest rate. We develop a very simple model of the relational contract between loan sharks and borrowers and use it to predict the effect of a crackdown on illegal moneylending. Consistent with our model, the crackdown raised the interest rate and lowered the size of loans.

Keywords: illegal lending, enforcement, relational contract

JEL Classification: K42, L14

Suggested Citation

Lang, Kevin and Leong, Kaiwen and Li, Huailu and Xu, Haibo, Lending to the Unbanked: Relational Contracting with Loan Sharks. IZA Discussion Paper No. 13360, Available at SSRN: https://ssrn.com/abstract=3627062

Kevin Lang (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kaiwen Leong

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

Huailu Li

Fudan University, School of Economics ( email )

Han Dan Lu 220 Hao, 11 Hao Lou, 128 Shi
Shanghai, Shanghai 200433
China

Haibo Xu

Tongji University ( email )

Shanghai
China

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